Judging by the spike in media coverage of tax fraud, one might think accountants have suddenly been inspired by Breaking Bad re-runs, and turned en masse to lives of crime.

Umm… no. But, there are two good reasons for all the attention.

One reason is because of a new law – the Foreign Account Tax Compliance Act. This law requires non-US banks to disclose financial information to the IRS for accounts held by US citizens.

Why the fuss over an arcane-sounding law? The IRS is cracking down on wealthy citizens who hide their income in off-shore accounts. And they’ve had some high-profile successes. Take the case of Credit Suisse, a Swiss bank headquartered in Zurich. They were fined $2.6 billion for helping Americans to evade US tax obligations.

That makes for good headlines. But, it doesn’t fully explain the abundance of press coverage.

The other reason for the media attention is something that impacts most Americans directly. Fraudsters are plotting and scheming to steal your tax refund.

Huh?! How can someone steal your refund, when it is deposited directly into your bank account? Here’s how the scheme works:

• A fraudster steals information about you. They don’t need a lot of information – just a few data points like name and Social Security number. If they are good, the fraudster might find out your employer’s name, too.
• Next, the fraudster creates a fake tax return. He makes up an income amount, maybe even adds a few deductions or credits. He also creates a fake W2 that makes it seem like you had taxes withheld from your paycheck throughout the year.
• Magically, the fake return always ends up with a refund balance.
• Finally – and the key to the whole scheme – the fraudster submits the return electronically, and asks for a direct deposit of the refund. He provides a bank routing number for an account he controls. In a few days, the money gets deposited. The fraudster withdraws the money and disappears.

You’ve just been scammed.

No one realizes there’s a problem, until you try to submit your valid tax return. Your return gets rejected, and you are left to fight to get your (valid) refund.

This scheme is known as Stolen Identity Refund Fraud – or SIRF. It is plaguing taxpayers and governments across the US.

Government officials have battled tax refund fraud for many years. What’s different now is that a mix of technology, globalization, and identity theft are making it much easier for the bad guys to cheat the system.

Innovative government leaders are not sitting idly as this problem grows. Several innovative states are revolutionizing the fraud-fighting tools they use to tackle this challenge.

The Department of Revenue in a southern state uses highly sophisticated analytics to catch tax cheats. Their analytical models are similar to what banks and credit card companies are using to stop financial fraud – techniques such as anomaly detection, predictive modeling, and link analysis.

When a new tax return is filed, this state looks to see if there is an unusual change in circumstances from your previous returns. Same address? Same employer? Same general financial circumstance? Your return is assigned a low risk score and processed immediately. That’s the easy part.

The hard part comes when there are differences. About 12% of Americans move to a new address in a given year. The average American stays at a given job for only 4.4 years. It’s perfectly normal for people to get promotions and raises… get married… have children… all events that can have a material impact on what your report on your tax return.

Analytics make these hard decisions easier. This state is able to figure out which changes are part of everyday, normal life… and which ones are unusual and may indicate someone is trying to steal your refund.

Suddenly stopped claiming your 3 kids as deductions? That’s odd. Reporting wages from a company that is no longer in business? Seems strange. Your new bank routing number is for a bank based in Nigeria? Or Russia? A return with these types of anomalies is assigned a high risk score. Some such returns are rejected automatically. For others, the Department of Revenue contacts the taxpayer to see if the return is valid.

Analytics are helping protect taxpayers from SIRF. And, they are helping speed up payment of valid refunds. That’s a classic case of good government at work. Every state should harness the power of math to protect and serve its citizens.