Tax season fraud is set to spike in 2024 as AI enables cybercriminals to generate lifelike images and make convincing videos that impersonate taxpayers to steal their refunds.

Why it matters: Victims of tax-related identity theft wait an average of 19 months for the IRS to correct and send their refunds.

How it works: Scammers gather information about you — like pictures, addresses, employment status and other personal data — that is either publicly posted, available in legal or illegal databases, or stolen through email phishing.

• Then they file a fake tax return before you file your real one.
• AI lets these fraudsters make fakes faster and enables them to use more sophisticated techniques to defeat IRS and accounting firm security measures.

By the numbers: The IRS received 294,138 complaints of identity theft in 2023, and ended up flagging more than 1 million tax returns for possible identify fraud.

Follow the money: Tax identity fraud "is a great crime, because so many tax refund dollars are transacted" and it's harder to spot suspicious behavior with a once-per-year transaction, Ari Jacoby, founder and CEO of cybersecurity firm Deduce, told Axios.

• Tax professionals may also be caught off guard by cybercriminals trying to get them to hand over sensitive client data by posing as real taxpayers.
• Jacoby says AI is particularly difficult for the IRS and tax professionals to deal with "because it is self-learning, trying techniques and failing until it succeeds."

The big picture: Congress' failure to pass federal privacy legislation has also aided identity fraudsters, guaranteeing that mountains of personal data will be available.

• The IRS has long been criticized for inadequate technology but is using Inflation Reduction Act funding to upgrade computer systems and increase audits of the largest corporate taxpayers — typically partnerships with more than $10 billion in assets.
• The U.S. Treasury used AI systems to identify $375 million in fraudulent transactions in 2023, including check fraud and among Social Security and tax refund payments, per Treasury deputy secretary Wally Adeyemo.

The IRS offers these tips for avoiding tax fraud: File as early as possible and use direct deposit to receive refunds.

• The agency also recommends opening an IRS account online to prevent a scammer from doing so in your name.
• Taxpayers should not trust communications claiming to be from the IRS if they come via phone, text or email. The tax agency only contacts taxpayers by postal mail.

What they're saying: Email scams are one of the main building blocks for cybercriminals looking to pull off identity theft and "pose a real risk to tax professionals and the taxpayers they represent," IRS Commissioner Danny Werfel said in January.

The other side: Colin Walsh, tax principal at Baker Tilly, told Axios that greater use of AI at the IRS will inevitably lead to cases that are identified as possible fraud when no fraud exists.

• "If you have a statistical anomaly that's flagged by the IRS computer system, you're (stuck) in the bureaucracy at that point," Walsh said. He advises "thoughtful and complete" responses to get the IRS off your back.

The bottom line: It pays to file your tax return sooner rather than later.

• Also, tax experts say that greater IRS use of AI means you're now more likely to end up on its radar if you cut corners on your tax return.