Intuit stops TurboTax e-filing of state returns after fraudulent filing spikes

Intuit has suspended electronic filing of all state returns from its TurboTax tax preparation software after 19 states' tax authorities reported unusual volumes of fraudulent returns.

Intuit today said it has suspended electronic filing of all state returns from its TurboTax tax preparation software after 19 states' tax authorities reported unusual volumes of fraudulent returns.

"Intuit and some states have seen an increase in suspicious filings and attempts by criminals to use stolen identity information to file fraudulent state tax returns and claim tax refunds," Intuit said in a statement today.

"Intuit took the precautionary step Thursday, Feb. 5, of temporarily pausing its transmission of state e-filing tax returns," the Mountain View, Calif. company added. Already-filed returns will be held until the states give their okay; new returns will not be sent to the states until the bans are lifted.

Intuit said that it believed the fraud did not stem from a security breach, and that the information used by criminals was obtained elsewhere.

On Thursday, a number of states, including Alabama, Georgia, Minnesota, Utah and Wisconsin (download PDF) issued news releases about increased rates of fraudulent returns.

Only Minnesota and Utah named Intuit and TurboTax. "We have stopped accepting tax returns submitted using TurboTax," Minnesota's revenue department said yesterday.

Utah (download PDF) said it had identified 28 fraudulent returns, but had marked an additional 8,000 as suspect. "The Tax Commission was also notified by some taxpayers as they tried to file their returns through Intuit/TurboTax, that they received a message that their return had already been filed."

Utah's State Tax Commission also said that it knew of at least 18 other states that have experienced the same problems.

Some states simply described the origination of the fraud as "third-party commercial tax preparation software," without naming TurboTax.

Alabama ( download PDF), for example, which has flagged 16,000 returns as possibly fake, said, "The fraudulent filings originate from data compromised through a third-party commercial tax preparation software process."

Each state contended that its computer networks had not been breached, but pointed a finger at tax preparation software.

Intuit reacted by establishing a hotline (800-944-8596) staffed with what it said were specially-trained identity protection agents, and said it would provide identity protection services and free credit monitoring to all affected customers. Intuit also said it will give those customers access to "all versions of its software" or offer tax preparers who will prepare returns free of charge.

"We understand the pain and frustration identity thieves cause taxpayers," said Brad Smith, Intuit's CEO, in today's statement. "Our number-one priority is making sure peoples' returns are filed timely, accurately, and safely."

Intuit has had a rough year. Last month, Smith apologized for not telling TurboTax customers of changes that required some to pay extra to file returns reporting self-employment, investment and rental income. The company has offered partial refunds to those who had already filed their federal returns and free upgrades to those who had not.

Ironically, last week Intuit sponsored a symposium in Washington, D.C. where experts and elected officials, including two U.S. senators, discussed the challenges of tax fraud.

According to the Wall Street Journal, tax officials from dozens of states participated in conference calls yesterday and today to discuss the situation. Those calls were organized by the Federation of Tax Administrators (FTA), a group whose members represent the tax collection agencies in all 50 states, the District of Columbia, several large cities and the U.S. Internal Revenue Service.

The FTA did not immediately respond to email and phone inquires today.

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