Fallout from widespread data breaches hurts many payment industry sectors, but this year's tax-filing season brings fresh pain for the prepaid card industry, with new details out connecting prepaid cards with some of last year's biggest tax refund fraud busts.

Prepaid cards played a major role in several of 2015's top scams, according to the Internal Revenue Service, which noted that tax identity fraud has shifted from the haven of small-time thieves to multinational criminal enterprises that mine the Internet for personal information to use nefariously.

The exposure comes from the trend of tax-preparation services and card issuers providing the option for consumers to get their tax refunds immediately on prepaid cards. This option is even popular with consumers who have bank accounts because refunds may still arrive faster on the prepaid card.

In recent years, crooks have figured out slick ways to use troves of stolen data to mass-produce bogus tax returns, which the IRS unwittingly routes to prepaid debit card accounts criminals set up because they offer a quick way to cash out.

The IRS this month said it busted a crime ring that tricked it into paying out nearly $10 million in refunds on fraudulent claims, with much of the money distributed via prepaid debit cards. Nine people in the Southeast U.S. were arrested in September 2015 for using stolen data including names, birth dates and Social Security numbers to file false tax returns between 2011 and 2013, the IRS said.

In Florida, a husband-and-wife team were arrested in June 2015 for filing false tax returns from 2011 to 2013 and directing the IRS to send refunds to prepaid debit card accounts. Law enforcement officers found lists and medical records containing personally identifiable information for 7,000 consumers in the pair's home.

Defendants in the biggest tax-fraud scams obtained stolen data from various sources, including the U.S. Army, several Alabama state agencies, a Georgia call center and employee records from a Georgia corporation, the IRS said.

The tax-refund fraud issue is a thorn in the side of prepaid card issuers, who are struggling to balance consumer convenience, security and brand reputations.

One frustration prepaid card marketers face is that much of the leverage for blocking tax-refund fraud lies with tax preparation firms, said Ben Jackson, director of the prepaid card practice at Mercator Advisory Group.

"Each tax year, tax preparers learn about the new ways that fraudsters try to steal data, and they get a little more sophisticated at verifying customers and identifying fraud," Jackson said.

But tax preparers are not steering away from using prepaid cards to deliver tax refunds to customers, he added, and plenty of options abound.

Jackson Hewitt Tax Service in January announced a deal to offer American Express Serve cards as an option for consumers to receive their federal tax refunds, and the money is available in the prepaid Serve account up to two days faster than via an ACH bank deposit, the Jersey City, N.J.-based tax-preparation company said. Customers qualifying for the minimum $150 tax preparation fee also receive $50 on a Serve card the day they file their taxes.

American Express also has agreements to deliver tax refunds through its Serve prepaid card for clients of TaxAct, a discount digital tax preparation service, and to clients of tax preparers who use Intuit Inc.’s ProSeries and Lacerte Software.

H&R Block offers fast access to tax refunds via its Emerald Prepaid MasterCard, issued by BofI Federal Bank; Green Dot Corp. uses celebrity spokesman Steve Harvey to promote quick access to tax refunds with its prepaid card; and Intuit's TurboTax software enables consumers to have tax refunds deposited to the NetSpend Premier Visa Prepaid Card.

NetSpend, a unit of Total System Services, hasn't seen any increase so far this year in successful tax identity fraud attempts, said Lisa Henken, the company's vice president of customer experience. New technology is keeping up with fraud, she said.

"The evolution of digital engagement provides new risks, but also provides new ways to engage with customers to protect accounts and information," she said.

Green Dot phased out its MoneyPak reload cards in 2014 to reduce fraud risks, including tax-collection scams (the MoneyPak became so widely associated with fraud that it featured as a plot point in Netflix's Orange Is the New Black).

Last year, with the MoneyPak out of circulation, Green Dot intercepted nearly half a billion dollars in attempted tax refund fraud, returning the money to the IRS and appropriate state agencies, a company spokesperson said.

It's hard to know how much it costs prepaid card issuers to cope with the threat of fraud, because that data is scarce, Jackson said. "Companies don't want to talk about it too much because they don't want to tip their hand to fraudsters," he added.

But relief may be on the way, as the IRS recently finalized a plan to work with tax-preparation services and the prepaid card industry to deter stolen identity tax refund fraud scams. The IRS says it thwarted 1.4 million bogus identity theft-related tax returns in 2015 totaling $8 billion. The IRS' Criminal Investigation unit claims a 93.2% conviction rate of criminals perpetrating tax refund fraud.

The IRS in October 2015 established a cross-industry Security Summit that meets regularly to tackle problems, with a financial services working group. Initiatives include  urging tax-preparation firms to collect up to 20 new data elements when submitting a tax return, and ensuring that prepaid card issuers verify identities and monitor accounts for unusual activity and contact the taxpayer to verify the legitimacy of a refund deposit.

A plan is under way to create common names for ACH files submitted by U.S. states to disburse tax funds, which would help the prepaid card industry filter for state tax refund deposits and spot fraudulent refunds loaded to prepaid cards, said industry sources involved in the discussions.

It's hard to anticipate the effect of the IRS' latest measures to stem stolen identity refund fraud that involves prepaid cards, Mercator's Jackson said.

"Much of the fraud prevention depends on what the IRS will allow in terms of new technology adoption," he said. "But I think it's fair to say that eventually, advances in technology, including remote ID verification by taking photographs of documents and selfies with smartphones, may help accurately identify tax filers in the future."

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