Return fraud is draining profits from retailers who think they’re only dealing with normal customer returns.
While you budget for legitimate returns as part of business operations, organized fraudsters are systematically exploiting your return policies through sophisticated schemes. These aren’t opportunistic customers—they’re coordinated attacks that can devastate profitability in ways that won’t show up in standard loss reports.
The problem extends beyond immediate merchandise loss. When fraudsters exploit your return process, you absorb wasted labor costs, shipping fees for illegitimate returns, and corrupted inventory data that affects your purchasing decisions.
What you’ll learn
13 common fraud schemes and their red flags
9 proven strategies to prevent losses without frustrating customers
How to create a fraud-resistant return policy
TL;DR:
Key takeaways
A clear, firm return policy is your first line of defense
Technology can help detect patterns in real-time
You can reduce fraud while maintaining a positive customer experience
What is return fraud?
Return fraud is the act of abusing a retailer’s return policy—often by returning stolen, altered, or previously owned items—to obtain a cash refund, store credit, or a higher-priced product. This extreme form of return abuse includes common schemes like wardrobing, receipt fraud, and price switching, costing U.S. retailers billions annually.
The true cost of return fraud extends far beyond the immediate loss of merchandise. When fraudsters successfully exploit your return process, you’re not just losing the product—you’re also absorbing wasted labor hours spent processing illegitimate returns, paying shipping fees for improper shipments, and dealing with corrupted inventory data that throws off your demand forecasting and purchasing decisions.
Return fraud differs significantly from other types of fraud that retailers face. While chargeback fraud involves customers disputing legitimate charges directly with their banks, and friendly fraud occurs when customers falsely claim they never received items they actually purchased, return fraud specifically exploits the retailer’s own return policy mechanisms.
| Fraud Type | Method | Target |
|---|---|---|
| Return Fraud | Abusing store return policies | Retailer’s return process |
| Chargeback Fraud | Disputing charges with banks | Payment processor |
| Friendly Fraud | False delivery claims | Bank/credit card company |
PRO TIP: Understanding these distinctions helps you implement targeted prevention strategies rather than treating all fraud the same way.
13 common return fraud schemes explained
Understanding how fraudsters operate is your first line of defense. These schemes range from simple opportunistic fraud to sophisticated organized crime operations that cost retailers millions annually. Each scheme is a distinct form of return fraud that targets different policy vulnerabilities.
Wardrobing
How it works: Customers purchase items with the specific intent to use them once or temporarily, then return them for a full refund.
Red flags:
Items returned with deodorant stains, makeup, or wear marks
Returns of formal wear immediately after major events
Seasonal items returned right after their peak usage period
Bricking
How it works: Fraudsters return a box containing worthless items instead of the original merchandise.
Red flags:
Packages that feel unusually heavy or light for the product
Sealed boxes that rattle or sound different when moved
Returns where the customer insists the box shouldn’t be opened
Price switching
How it works: Customers swap price tags from cheaper items onto expensive products, then attempt to return the expensive item for the higher “purchase price.”
Red flags:
Price tags that appear tampered with or don’t match the product
Returns where the claimed purchase price doesn’t match your records
Multiple returns from the same customer with pricing discrepancies
Price arbitrage
How it works: Fraudsters purchase items during sales or clearance, then attempt to return them at regular price points for profit.
Red flags:
Returns without receipts during off-sale periods
Customers claiming higher purchase prices than current retail
Multiple returns of the same discontinued or clearance items
Receipt fraud
How it works: Using fake, altered, or stolen receipts to return merchandise that was never legitimately purchased.
Red flags:
Receipts that appear photocopied or digitally altered
Receipt paper that doesn’t match your store’s standard
Transaction dates or amounts that don’t align with your system records
Tender fraud
How it works: Making purchases with deceptive payment methods, then returning items for cash or legitimate store credit.
Red flags:
Returns requested immediately after purchase
Customers insisting on cash refunds for credit card purchases
Returns where the original payment method is no longer valid
Employee-assisted schemes
How it works: Store employees collaborate with fraudsters to process illegitimate returns or override system safeguards.
Red flags:
Specific employees processing unusually high numbers of returns
Override codes used excessively by certain staff members
Returns processed outside normal procedures without proper documentation
Cross-retailer returns
How it works: Returning items purchased from one retailer to a different retailer that sells similar merchandise.
Red flags:
Products that don’t match your exact SKU or model numbers
Items with different packaging or labeling than your inventory
Returns of products you don’t currently carry or have never sold
Open-box fraud
How it works: Purchasing items, removing valuable components, then returning the incomplete product as “defective.”
Red flags:
Electronic items missing accessories, cables, or internal components
Returns where external packaging appears untouched but contents are altered
Claims of “missing parts” that are typically included with the product
Switch fraud
How it works: Purchasing a new item, swapping it with an older or broken version of the same product, then returning the inferior item.
Red flags:
Returned items that show excessive wear despite recent purchase
Serial numbers that don’t match purchase records
Product condition that doesn’t align with the return timeframe
Stolen merchandise returns
How it works: Returning stolen merchandise for cash or store credit, often without receipts. This practice involves returning stolen merchandise to retailers who are unaware of the theft.
Red flags:
Multiple high-value returns without receipts
Customers who seem unfamiliar with product features or packaging
Returns of items that are frequently targeted for theft
Bracketing
How it works: Deliberately purchasing multiple sizes, colors, or versions of items with the intent to keep only one and return the rest.
Red flags:
Orders with multiple variations of the same item
Returns that consistently keep only one item from multi-item purchases
Customer purchase patterns that show excessive return rates
Empty box fraud
How it works: Claiming that packages arrived empty or were missing items to receive replacements or refunds.
Red flags:
Multiple “empty package” claims from the same customer
Claims that don’t align with shipping weight records
Customers who report issues immediately upon delivery without inspection time
How to detect return fraud
Detecting return fraud requires combining human intuition with data-driven analysis to identify patterns that legitimate customers rarely exhibit. The most effective detection programs blend behavioral observation with systematic data monitoring.
Behavioral red flags
Train your customer service and returns processing team to watch for these suspicious patterns:
Customers making frequent returns without receipts across multiple store locations
Returns of items just before warranty expiration dates, especially for electronics
Unusual nervousness or evasiveness when questioned about purchase details
Customers who seem unfamiliar with product features despite claiming recent purchase
Requests for specific return processing methods (“cash only” or specific staff members)
Data-driven detection methods
- Transaction monitoring: Your point-of-sale system should flag customers with return frequencies exceeding normal patterns. Set alerts for customers who return more than 30% of their purchases or have return values exceeding their purchase history.
- Customer history analysis: Track account age, lifetime return rates, and purchase-to-return timing. New accounts with immediate high-value returns warrant additional scrutiny.
- Device and IP tracking: For online retailers, monitor for suspicious patterns like multiple returns from the same IP address or device fingerprint, especially when associated with different customer accounts.
Modern loss prevention teams integrate these detection methods through centralized dashboards that connect with sales systems and ecommerce fulfillment platforms. These systems can flag anomalies in real-time, allowing staff to intervene before illegitimate returns are processed.
NOTE: Set your fraud detection thresholds based on your specific customer behavior patterns to detect and prevent fraud effectively, rather than using industry averages. A luxury retailer’s normal return rate differs significantly from a discount chain’s patterns.
9 proven ways to prevent return fraud
Shifting from detection to prevention offers the most effective protection for your profits. While catching fraud after it happens limits damage, preventing it entirely eliminates the loss and associated processing costs.
01
Refine your return policy: Create clear, specific policies that eliminate ambiguity while remaining customer-friendly. State explicit time limits (30 days is industry standard), condition requirements, and proof-of-purchase needs.
02
Require original receipts: The simplest barrier against many schemes is requiring proof of legitimate purchase. This immediately eliminates cross-retailer returns and many stolen merchandise schemes.
03
Leverage technology: Implement AI and machine learning tools that score returns in real-time. These systems analyze customer history, return patterns, and transaction details to flag high-risk returns before processing.
04
Offer store credit for no-receipt returns: When customers can’t provide receipts, offering store credit instead of cash refunds eliminates the financial incentive for many fraudsters while still providing legitimate customers with resolution options.
05
Train your staff comprehensively: Educate employees on common fraud schemes, proper verification procedures, and clear escalation protocols. Well-trained staff serve as your first line of defense against sophisticated fraud attempts.
06
Implement restocking fees: For high-value items or products prone to abuse, restocking fees discourage casual returns and deceptive schemes. Apply these fees consistently and communicate them clearly at the point of sale.
07
Ensure policy consistency across channels: For businesses using omnichannel fulfillment models, maintaining identical return rules across online and in-store channels prevents fraudsters from exploiting policy gaps between different sales channels.
08
Create holiday-specific procedures: Implement stricter verification requirements or shorter return windows during post-holiday peak fraud periods. Consider requiring receipts for all returns during January and February.
09
Collaborate with industry partners: Share fraud intelligence with other retailers through industry associations like the National Retail Federation. Report serious fraud cases to law enforcement to support broader anti-fraud efforts.
Sample return policy template
A well-crafted return policy serves as the foundation of any fraud prevention strategy. Your policy must balance fraud prevention with customer satisfaction, clearly communicating expectations while remaining fair to legitimate customers.
Essential policy components:
Return window: Specify exactly how long customers have to return items (e.g., “30 days from purchase date”)
Proof of purchase: State receipt requirements clearly (e.g., “Original receipt required for all returns and exchanges”)
Item condition: Define acceptable return condition (e.g., “Items must be unused, in original packaging, with all tags attached”)
Refund method: Explain how refunds are processed (e.g., “Refunds issued to original payment method; store credit for returns without receipt”)
Exceptions: List items that cannot be returned (e.g., “Final sale items, opened software, personalized products”)
PRO TIP: Download our free, professionally written return policy template that you can customize for your specific business needs and legal requirements. This template includes all essential fraud prevention clauses while maintaining customer-friendly language.
Legal consequences & compliance
Is return fraud a crime? Yes, return fraud is prosecuted as theft or fraud under both state and federal laws, with penalties varying based on the value of merchandise involved.
The severity of charges depends on the total value of illegitimate returns. Most states classify theft based on dollar thresholds, with higher amounts triggering felony charges that carry significant prison sentences and fines.
| State | Felony Threshold |
|---|---|
| California | Theft over $950⁶ |
| Texas | Theft over $2,500⁷ |
| New York | Theft over $1,000 |
| Florida | Theft over $750 |
When building cases against those committing return fraud, law enforcement requires comprehensive evidence. Preserve all relevant documentation, including transaction records, security camera footage, and detailed notes of suspicious interactions. Many successful prosecutions rely on pattern evidence showing repeated deceptive behavior across multiple transactions.
Balancing fraud prevention with customer experience
The biggest challenge in fraud prevention lies in implementing security measures without creating friction for honest, loyal customers. The most successful programs use risk-based approaches that apply stricter scrutiny only when warranted.
- Avoid false positives: Implement risk-scoring technology that analyzes purchasing patterns and customer history rather than applying blanket restrictions. A customer with a long purchase history and low return rate should experience a smoother return process than a new customer with suspicious patterns.
- Offer flexible alternatives: Position exchanges and store credit as convenient options rather than restrictions. Many customers prefer exchanges over refunds, and promoting this preference reduces cash losses from fraud while improving customer experience.
- Segment your approach: Use customer data to identify and reward loyal customers with streamlined return processes. VIP customers might skip certain verification steps, while new or flagged accounts receive additional scrutiny.
- Improve operational efficiency: Partner with specialized 3PL services to manage complex return logistics, ensuring legitimate returns are processed quickly while maintaining thorough fraud checks. Efficient processing reduces customer frustration and improves satisfaction rates.
NOTE: The goal isn’t to eliminate all fraud—it’s to reduce fraud to acceptable levels while maintaining positive customer relationships that drive long-term profitability.
Checklist & next steps
Use this actionable checklist to implement fraud prevention measures systematically:
Immediate actions (this week):
Review and update your return policy language
Implement receipt requirements for cash refunds
Train customer service staff on common fraud red flags
Short-term improvements (next month):
Analyze return data for suspicious patterns
Implement restocking fees for high-risk categories
Set up store credit as default for no-receipt returns
Long-term enhancements (next quarter):
Research AI-based return scoring technology
Ensure policy consistency across all sales channels
Develop enhanced procedures for holiday seasons
Download and customize our return policy template
Frequently asked questions
Is return fraud a felony?
Return fraud can be charged as either a misdemeanor or felony depending on the total value involved. Each state sets different thresholds, but generally theft over $500-$1,000 becomes a felony with potential prison sentences.
How does wardrobing work?
This practice occurs when customers purchase items with the specific intent to use them temporarily, then return them for full refunds. Common examples include buying formal wear for events, electronics for short-term projects, or seasonal items for brief use.
How much money do retailers lose to refund fraud?
In 2024, retailers lost an estimated $103 billion to all forms of improper returns, representing over 15% of total return volume. This figure has grown dramatically as ecommerce expands and fraud techniques become more sophisticated.¹
Final thoughts
While return fraud represents a significant threat to retail profitability, a strategic combination of clear return policies, advanced detection technology, and efficient operations can dramatically reduce your exposure. The key lies in implementing fraud prevention measures that protect your business without alienating legitimate customers.
The strategies outlined in this guide—from refining your return policy to leveraging AI-powered fraud detection—provide a comprehensive framework for fighting back against improper returns. Remember that fraud prevention is an ongoing process that requires regular monitoring, policy updates, and staff training to remain effective.
Citations
- Appriss Retail and Deloitte. “2024 Consumer Returns in the Retail Industry.” Digital Commerce 360, 30 Dec 2024.
- NRF and Happy Returns. “2024 Consumer Returns Survey.” National Retail Federation, Dec 2024.
- Spatz Law Firm. “What Is Return Fraud?.” Blog, 7 Aug 2019.
- CNBC. “Refund Fraud Groups, Organized Like Businesses, Are Robbing Retailers of Billions.” Instagram, 17 Mar 2024.
- WLOS News. “Police Pull Rug from Under Home Goods Fraud Suspect.” WLOS, 16 Apr 2025.
- KLF Criminal Defense. “When Does Theft or Burglary Become a Felony in California?.” KLF Criminal Defense, 15 Dec 2024.
- TLG Texas Law. “How Much Theft Is a Felony in Texas?.” TLG Texas Law, 19 Dec 2024.
