Without the right technology, it's easy for businesses to mistakenly pass fake W-2 forms as valid.
Identity thieves and organized crime rings use the information on these forms to claim unemployment benefits in others’ names. This includes stealing the victim's name, address, Social Security number (SSN), annual wage details, withholdings from income taxes, and benefits.
In most cases, victims of these scams are unaware of an identity breach. But that’s not all. They may also receive a 1099-G tax form in the mail detailing benefits they didn’t receive.
Such fraud surged during the coronavirus pandemic, when many people fell victim to unemployment fraud during tax filing season.
Thieves posted erroneous wages on fake W-2 forms using their victims’ names and employment identity numbers (EINs), siphoning more than $87B in federal unemployment benefits.
As fake W-2 forms become a nationwide problem, it’s crucial for banks and financial institutions to know how to verify one.
Why do banks and lenders ask for 1099s?
Financial institutions (especially lenders) were among the worst hit during the 2008 mortgage crisis. High rates of mortgage loan defaulters brought down the entire sector (one of the worst events in U.S. history) resulting in the Great Recession.
Since then, banks and lending institutions made it tougher for consumers or business owners to apply for credit. They ask potential borrowers several assets, debt, and salary history questions before approving loans.
It’s no longer enough to take applicants on their word that they’ll repay loans or allow them to self-certify.
Instead, lenders perform credit checks on each borrower to determine creditworthiness and/or proof of income; the Form W-2 offers sufficient evidence.
Occasionally, lenders may request additional tax records, including 1099 forms, which report the type of income a borrower or taxpayer earned throughout the year. Such income sources range from interest income earned from a bank account to dividends paid for owning stock.
Banks and lenders use 1099 forms to review borrowers’ annual tax returns and verify their income depending on the size of the loan.
Based on the borrower’s income history (or lack of it) the bank may:
- Approve
- Impose additional requirements before releasing the funds
- Deny the loan altogether
How do they use the 1099s?
While 1099 and W-2 forms are solely for annual income tax return purposes, not everyone sees them that way.
Fraudsters (identity thieves, cybercriminals, and other scammers) create false 1099s and fake W-2 forms and commit fraud.
For example, Patrick Poux, a former Brooklyn resident, created fake W-2 forms with excessively high federal income withholdings to gain millions in fraudulent refunds through shell companies he managed. Poux pleaded guilty to garnering about $3M in tax returns and Covid-relief funds: money which he spent on a life coach and luxury shopping.
Breon Peace, the U.S. Attorney who pursued the case against Poux, said he admitted to “preparing and filing false applications for millions of dollars” in tax and COVID-19 disaster relief funds. Yet Poux’s tax-related identity theft scam is just one among many fake W-2 form schemes defrauding U.S. taxpayers.
Some cybercriminals launch scams through phishing emails that seek to draw sensitive employee information from people in authority, including chief operating officers. The fraudsters pose as executives and send emails to finance or payroll personnel requesting copies of employees’ W-2 forms.
Initially, the fraudsters send friendly emails, then ask for all Form W-2 and employment details. Several reported cases show that once they get the data they want, they either:
- Use it to file fraudulent tax returns
- Follow-up with a request for a wire transfer
- Post it for sale on the DarkNet
Some criminals go to great lengths to lure their victims, offering seemingly legitimate “tax services” designed to separate them from their money, identities, or anything of value within their reach. The goal is to steal the victims’ identities and tax refunds.
These scams might even include fake tax forms or websites that mimic the Internal Revenue Service (IRS) to trick the victim into disclosing personal or work-related information.
The IRS regularly cautions taxpayers against such scams by publishing its annual “Dirty Dozen” list.
Some of these schemes are disguised as debt payment options for mortgage or credit card debt. For example, victims might be asked to fill out:
- Form 1099-MISC
- Miscellaneous Income scam
- Bogus bonded promissory notes
- Bonds
- Worthless checks
The con artists provide fake Form 1099s or W-2 forms that appear to be issued by a large mortgage company, loan service, or bank the victim may have had a prior relationship with.
How fake 1099s can negatively impact a bank or lender
Fraud happens anywhere. However, banks and other financial institutions are major targets of fraud schemes, which increase in number, volume, and variety.
Different lenders have experienced untold significant losses because of fake documentation and other fraudulent activities, particularly with commercial mortgage loans.
It’s difficult for banks to detect when fraud is happening, increasing the likelihood of making losses. This includes those incurred from paying stiff penalties for neglect.
How to spot a fake W-2 form
Banks and lenders rely on genuine documentation to approve or deny loan or credit applications.
It’s challenging to identify a fake W-2 form with the naked eye. Internet sites, off-the-shelf software, and advanced W-2 generator tools make it relatively easy to create fake W-2 statements.
That’s why you need to be well-read and informed on what to look for.
From a Fraud Investigations symposium organized by the Federal Financial Institutions Examination Council (FFIEC), some of the red flags to look for in a fake W-2 form include:
- Income inconsistency: the borrower’s income doesn’t match their type of employment
- Invalid SSN: differences in the SSNs on the W-2 form and other documents, or it's been recently issued
- Grammatical errors: misspelled names or numbers that appear to be “squeezed in,” and other glaring grammatical issues.
- Data variances: Employment data varies with other file documentation
- Amounts: round dollar amounts appear for the prior year’s earnings or year-to-date (the latter also doesn’t have accurate totals)
- Withholdings: amounts withheld for Medicare, Social Security, and other government programs don’t match the required levels
- Check numbers: No chronological increase in the figures
- Debt disclosures: fake W-2 forms don’t disclose debts like credit union loans, which are reflected as deductions from the employee’s pay
- Commission-type: only shows “base” salary
- Document alterations: cross-outs or white-outs, inconsistent fonts, W-2 is typed, and paystubs are computer-generated
- Non-computer generated form: W-2 forms from a large employer are usually computer-generated (If not, it’s likely a fake version)
- Strange EIN: fake forms don’t have the XX-XXXXXXX EIN format or it’s not all numeric.
- Names and addresses: inaccurate names and addresses of the employer and employees
- Income differences: income differs from what's reported on tax returns, mortgage loan applications, and VOE (verification of employment)
- Excess ceilings/percentages: medicare wages or Medicare taxes, the Federal Insurance Contribution Act (FICA), and other local taxes (where applicable) exceed certain set percentages or ceilings
- Missing Copy C: if the W-2 form isn't “Employee’s Copy” (Copy C), it’s fake
Prevent fraud by verifying the validity of a W-2 form
Financial institutions have stringent policies, guidelines, and precautions in place, protecting them from fraudulent activities. They check for inconsistencies and inaccuracies in customers’ records, using financial history and public records to confirm the information provided.
Technology helps, too. Software and other programs, such as Inscribe, have special anti-fraud features in place to effectively fight against fraud attempts.
These tools confirm information and flag inaccuracies in customer information against multiple sources, including bank records. Some tools also use special embedded coding features for tracking any edits, alterations, or modifications to documents.
Ready to protect your bank or lending institution from fake W-2 schemes? Talk to our experts to learn how Inscribe can help you detect and prevent fraud.
