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How to beat tax identity thieves at their own game

Electronic tax filing season is officially underway, and so is the annual race between taxpayers and identity thieves who want to claim refunds in their name.

"The low physical risk and high potential for financial gain has made stolen identity refund fraud a crime of choice for drug dealers and gangs," said Kathryn Keneally, assistant attorney general for the Justice Department's Tax Division, testifying to a Senate committee last year.

The IRS paid as much as $3.6 billion in fraudulent refunds to identity thieves in 2012, according to a November report by the Treasury Inspector General for Tax Administration. That is an improvement from $5 billion the year before, according to the report. An estimated 1.6 million taxpayers were victims of identity theft last year.

But as the government gets better at fighting this rampant crime, the crooks are getting more savvy.

(Read more: Thieves lining up)

Federal authorities in San Diego said they busted an international crime ring in September that stole more than 2,000 identities and used them to claim more than $20 million in bogus refunds. A federal grand jury indicted 55 people; 33 remain at large.

"I would say that this is one of the most sophisticated operations we've ever seen," IRS Special Agent in Charge Anthony Orlando told NBC station KNSD.

Many of the defendants are foreign nationals from former Soviet bloc countries, including Russia, Kazakhstan and Turkmenistan, in the U.S. on work or travel visas. They allegedly opened U.S. bank accounts and rented apartments and post office boxes in the San Diego area for the sole purpose of receiving the stolen refunds. And they are accused of trying to cover their tracks when filing electronic returns by disguising their Internet Protocol (IP) addresses.

Authorities are particularly troubled by criminals' increasing technological skill and ability to infiltrate tax firms, financial institutions and hospitals—all of them treasure troves of personal data.


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