Tax-related Identity Theft: A Growing Problem


By Cynthia Hoffman

The IRS recently announced a national crackdown on identity theft as part of a larger effort to protect taxpayers. The investigation targeted suspects in 32 states and Puerto Rico. In fiscal year 2012, the IRS initiated more than 900 investigations into criminal identity theft, tripling the number of investigations initiated in fiscal year 2011!

A tax-related identity theft starts when a thief steals or otherwise illegally obtains social security numbers and other personal information of a taxpayer, and then uses this information to file false tax returns for refunds. In 2012, government investigators uncovered a single address that was used to file more than 2,000 tax returns totaling $3.3 million in refunds. Most thefts involve the use of direct deposit or prepaid debit cards, and although banks have strict rules to verify identity of account holders, they do not have the ability to determine if the deposit is for a legitimate refund.

Why is this issue a problem to the legitimate taxpayer? If the identity thief uses the taxpayer’s social security number to get a job, the taxpayer has extra W-2 wages erroneously reported to the IRS, which initiates a matching audit. The identity thief who files an erroneous tax return for a refund will usually file early, before the legitimate taxpayer has had a chance to file and before the IRS has matched information to W-2’s and/or Form 1099. Once the legitimate taxpayer files a return, the IRS will issue a notification of duplicate return. This notification will hold up the legitimate taxpayer’s refund. The process of clearing up such problems can take months, if not longer.

How can a taxpayer prevent this type of fraud? Taxpayers are encouraged to file early and by e-file, if possible. Taxpayer should be on the lookout for “phishing” emails. The IRS does not send unsolicited tax account related emails to taxpayers and will never ask for personal information via email. Do not click on any link sent for the “IRS” through email. Report suspicious emails to the IRS at 800-829-1040 or forward the email to phishing@irs.gov. The usual security measures you hear about to help prevent identity theft apply, such as securing personal information (including tax returns) at home and on computers. Properly destroy tax-related documents when no longer needed. Do not provide social security numbers to businesses that do not require it for your transaction. Check your credit report every 12 months for suspicious activity. Ask anyone who handles your personal information, including your tax preparer, about their policies for securing your personal information.

If you do receive a notice from the IRS that appears to be related to identity theft, respond to it immediately. You will need to fill out the IRS Identity Theft Affidavit, Form 14039. More information on steps to take can be found on the IRS website.

Identity theft is a growing problem in our society. Tax-related theft is on a substantial rise. Taking preventive action, being on guard and knowing what to do to if a thief strikes are key to a quick resolution to the taxpayer and, hopefully, bring those responsible to justice.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter

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