[clogston]

Lots of speculation in this thread. Here's my hypothesis.

Federal tax return fraud is huge. It's a growing problem that the IRS is struggling to cope with and it's been going on for years. State tax return fraud has been largely non-existent... so non-existent in fact that USA Today reported the state of Minnesota got suspicious when there were 2 reported cases of fraud[0].

So what's going on and why is TurboTax being called out by these states? First off, know that when a tax return is e-filed either to the fed (who also handles most state e-filing) or directly to the state, every software provider transmits an identifier along with it. So if you get a bunch of bogus tax returns submitted it's trivial to see where they're all originating from. Second, the rise in federal tax return fraud has grown steadily in relation to the number of software providers offering a free option... the reason we haven't seen state fraud as rampant is because it has always cost money to prepare your state return with software. But what's new this year besides a dramatic increase in state tax return fraud? TurboTax's Absolute Zero campaign. That's right, a whole lot more people can file their states taxes for free using TurboTax's software. That may seem great at first blush if you qualify, but an unintended consequence of that is it's now a completely free roll for a fraudster to file a state tax return IN ADDITION to a federal one.

[0] http://www.usatoday.com/story/money/personalfinance/2015/02/...

[nsxwolf]

Why would free filing increase fraud? It's always been free to file if you do it yourself.

Can't it be that there's just more at stake with the Federal return in terms of total dollars, and far more tax deductions available?

[gaadd33]

If it cost $10 per filing that would be a huge up front cost for someone, especially if it turns out many of their fake returns are invalidated en mass. It's pretty hard to file several thousand fake returns with plausible data (esp if you have last years or several years ago data) by hand, if you are putting up that much work you might as well just prepare people's taxes in a legitimate way.

[secalex]

Free filing is going to increase fraud since $10 means the attackers need enough credit card numbers to not set off Intuit's or the payment networks' fraud systems. That probably means almost a 1:1 ratio between returns and working CCs, with Intuit having the obvious option of checking zip codes against the returns.

[TrevorJ]

e-fraud is about minimal investment and casting a wide net. Even a few dollars of cost to file means there is lower hanging fruit out there.

[codersteve]

>>State tax return fraud has been largely non-existent... so non-existent in fact that USA Today reported the state of Minnesota got suspicious when there were 2 reported cases of fraud

I doubt it. Most states are poor at fraud detection, they are likely losing a lot but just don't know it.

[dragonwriter]

I actually don't doubt that State tax return fraud is much less prominent than Federal tax return fraud, for one key reason: there's less money at stake, because of lower state income tax rates (more importantly, lower per-taxpayer state withholdings -- which are in part due to lower rates, but I also get the impression that at least some states use withholding formulas that are more likely to underwithhold than the federal withholding formula, resulting in both lower refunds and less money that can be stolen by tax return fraud, even compared to the nominal tax rate.)

Its more profitable to do fraud where the money is.