U.S. tax season returns, and with it refund fraud

(Corrects paragraph 8 to say Velasquez worked in San Diego district attorney's office but not as a prosecutor)

By Patrick Temple-West

WASHINGTON, Feb 18 (Reuters) - Kev Imandoust guards his U.S. Social Security number with 25-character passwords and email encryption software. But in 2012, the San Diego accountant became one of more than a million Americans whose identities were stolen to use for tax refund fraud.

When he tried to file his taxes days before the April 15 deadline two years ago, Imandoust had his return rejected by the Internal Revenue Service. Someone in Florida had filed using his name and Social Security number, the IRS said.

It took several months for Imandoust to prove he was a victim and free up his $750 tax refund. Now 34, he may never know how his identity was stolen. He suspects weak security controls at a business that held his information.

Some 1.6 million Americans were victims of ID theft tax refund crimes in the first half of 2013, up from 1.2 million in all of 2012, the IRS watchdog, the Treasury Inspector General for Tax Administration (TIGTA), said in a November report.

Scammers typically file phony electronic tax forms for IRS refunds using stolen names and the Social Security numbers used to identify Americans in what TIGTA chief J. Russell George last November branded "a growing epidemic."

Tax professionals predict another season of similar scams despite government efforts to curb them. In fiscal year 2013 which ended Sept. 30, a total of 438 individuals were sentenced to an average 38 months for identity theft tax refund fraud, the IRS said in January. This compared with 223 individuals sentenced to an average 48 months in fiscal 2012.

"It's still too financially lucrative and too hard to get caught," said Eva Velasquez, president and CEO of the Identity Theft Resource Center, a nonprofit group that helps identity theft victims.

"Everything is indicating that the levels are either going to stay flat, which is very bad, or they're going to increase," said Velasquez, who formerly worked in the San Diego district attorney's office.

Nina Olson, who as National Taxpayer Advocate defends taxpayers' rights within the IRS, said she expected it would take another year before the number of fraud cases started to go down.

TAX SEASON UNDER WAY

On Jan. 31 Americans began filing 2013 tax returns, due by April 15. In the first week of tax season, the IRS issued about 19.5 million refunds, up 18.5 percent over the comparable period last year, the IRS said. The average refund this year is $3,317, up from $3,170 last year.

Scammers typically make their bogus filings early in tax season before targeted taxpayers file their returns, industry professionals said. TIGTA found they submit multiple filings from the same address, sometimes from abroad.

This year, the IRS is implementing new filters to catch bogus filings. "We will have more flexibility to stay ahead of identity thieves," IRS Commissioner John Koskinen told Congress this month.

The IRS is using data analytics to spot suspicious tax refunds and is screening specifically for refunds filed from the same address, he said.

Mark Steber, chief tax officer at tax preparation company Jackson Hewitt Tax Service Inc, predicted "another bad year, no better, no worse." Last year Jackson Hewitt reported to the IRS a refund fraud ring in Seattle that was filing dozens of tax returns with stolen identities to claim about $9,000 on each refund.

"The IRS has beefed up, (but) so have the criminals," Steber said.

(Reporting by Patrick Temple-West; Editing by Howard Goller and Phil Berlowitz)