TurboTax resumes filings amid fraud outbreak

TurboTax late Friday restored the ability of its software to e-file state tax returns across the USA after the company turned it off Thursday finding "an increase in suspicious filings," the company said today.

The tax-preparation software company has found an increase in criminal activity where stolen personal data are used to file fake state returns with state authorities. This illegal act allows fraudsters to claim tax refunds from state governments. TurboTax turned off the filing feature Thursday to stop any potential fraud. But e-filing was restored at about 6 p.m. eastern.

"We are taking this issue very seriously and from the moment it emerged it has been all-hands-on-deck," says Brad Smith, CEO of TurboTax publisher Intuit. "I am more than pleased we were able to resume transmission for our customers within about 24 hours."

An internal TurboTax investigation has found the breaches were not due to a problem with its own systems, but criminals digging up the personal information elsewhere. The company said the investigation is ongoing. Intuit says it's working with state tax officials to get the e-filing security back to where it needs to be to turn it back on. TurboTax customers who already e-filed their state returns don't have to do anything. The returns will be transmitted again when the problem is resolved, TurboTax says.

The e-filing halt only affected state returns. Federal tax returns could still be filed electronically, says TurboTax and confirmed by Anthony Burkes, spokesman at the IRS.

Intuit's move comes after Minnesota's Department of Revenue says it will no longer accept tax filings submitted electronically using TurboTax, according to a statement. The state says two taxpayers logged into TurboTax to file their tax forms but were told filings were already made, reports the StarTribune. The state is reviewing thousands of other state filings sent electronically.

So far, the problem appears to be centered on TurboTax. H&R Block, which makes tax-preparation software that competes with TurboTax says "we have no indication this issue exists with H&R Block online state returns," in a statement issued by the compay. "H&R Block continues to file state and federal returns as usual."

H&R Block says it has "sophisticated monitoring and quality assurance methods," to thwart this type of fraud. Additionally, H&R Block won't allow the transmission of a state e-filing until there's also an accepted federal return filed, too, the company says.

States are currently looking for patterns in fraudulent returns, and sharing what they find with each other, says Gale Garriott, director of the Federation of Tax Administrators. This information - once added to systems - will help the states identify returns that are more likely fraudulent, he says. "States are taking this seriously and want to make sure legitimate taxpayers can file," he says.

All the necessary personal information to fill out a fraudulent tax return is readily available for purchase in underground sites online, said Victor Searcy, IDT911, an identity management company based in Scottsdale, Ariz..

"It's almost like going to Amazon, you can buy just one or in bulk. And just like at Costco, if you buy in bulk it costs less," he said.

This type of boiler room tax fraud operation isn't uncommon, although most previously uncovered fraudsters have focused on federal tax returns. A

report

by the Government Accountability Office released in 2014 found that the IRS paid $5.2 billion in refunds filed with fraudulent identities in 2013.

The criminals often simply set up shop in a hotel room somewhere "and start banging out refunds that they file online," said Searcy, who works with customers who are the victims of fraud.

"Usually what happens is they go and file their own tax refund and when they get a notification from the IRS that there's already a return that's been submitted. They then discover that somebody has already filed, using their information," he said.

The process is highly remunerative, in part because the IRS has made it so easy for citizens to get their refunds.

Unfortunately, that "also makes it easier for the criminals. They can have checks mailed, they can have them deposited directly or they can have it put on a prepaid debit card," he said.

The state e-file fiasco is just the latest headache for Intuit's TurboTax this tax season. This year, users of the software have been outraged by a stealth price hike that forced many investors and self-employed people to pay 50% more for the software. Intuit hopes to put an end to the controversy Saturday when anyone who buys the less expensive Deluxe version can upgrade to the Premier or Home & Business version for free.

Shares of Intuit (INTU) closed down $3.88, or 4.2%, to $87.83 on the news.