Sadly, tax identity theft and refund fraud cause major headaches for taxpayers every year. Basically, criminals are after your tax refund. “Tax identity theft occurs when someone tries to file a tax return under someone else’s Social Security number,” says James Wright, a CPA and partner at the office of Carr Riggs & Ingram in Niceville, Florida.
If criminals obtain enough sensitive information to file a tax return, such as your Social Security number, they can file a tax return before you do and claim your refund.
More than $14.5 billion of identity theft-related tax refund fraud was attempted in the 2015 tax year, according to the Government Accountability Office (GAO). The IRS prevented at least $12.3 billion of that fraud, but still paid at least $2.2 billion in fraudulent refunds.
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How Will You Know You're a Victim of Tax Identity Theft?
Normally, you find out you’re a victim of tax identity theft when you go to file your tax return and you’re notified a return has already been filed using your Social Security number.
“Many fraudulent returns are filed early in the tax filing season because the fraudsters are trying to get the bad tax return into the system before the taxpayer files their true tax return,” says Wright.
If you e-file your return after a case of tax fraud, the return will typically be rejected. If you paper file, you’ll receive a letter stating that your return has already been filed. You may also be a victim if you owe additional tax, have a refund offset, or have had collection action taken against you for a year when you didn’t file a tax return or IRS records indicate your received wages or other income from an employer you never worked at.
However, the IRS is trying to combat tax fraud. It now notifies you if it believes somebody filed a suspicious return using your Social Security number, even if you haven’t filed yet. In the majority of cases, the IRS will contact you through regular mail delivered by the USPS before calling you. Even so, the IRS won’t be able to catch all fraudulent returns, so don’t rely on it to notify you.
How to Prevent Tax Identity Theft and Refund Fraud
Preventing tax identity theft requires you to be very mindful of your personal information.
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Criminals can gain access to your information in many ways.
Here are a few tips to help protect your information from identity thieves:
- Never give out your Social Security number (SSN) and other sensitive personal information unless absolutely necessary. This will limit the number of places that it could be compromised.
- Practice proper password security by never using the same password twice.
- Be hypervigilant when clicking links in any email you receive to avoid phishing attempts.
- Secure your mailbox so criminals can’t steal your mail or any tax documents you may receive by mail.
In addition to protecting your identity, you should file your tax return as fast as humanly possible. If you file the first tax return using your SSN and a fraudster tries to file a fraudulent return later, that person's return will be rejected, not yours.
Of course, this isn’t always possible. You need to make sure you have all of the proper information to file your tax return before you file. If you have a complex tax situation and don’t receive all of the necessary documentation right away, you may not be able to file your tax return quickly.
What to Do If You Find Out Someone Already Filed a Return Using Your SSN
If you find out you’re a victim of tax identity theft and refund fraud, you’ll have to do a few things.
Protecting Yourself From Further Damage
First, if you’re a victim of tax identity theft, the criminals have enough information to do damage to other areas of your life. File a complaint with the FTC at IdentityTheft.gov. Then place a fraud alert on your credit reports at Equifax, Experian, and TransUnion.
Once you place a fraud alert at one bureau, the others should automatically do the same. That said, it never hurts to double-check with all three bureaus to make sure. You should also check your credit report to see if any accounts have been opened fraudulently. If you find fraudulent accounts, follow up to investigate and have them closed.
Reporting the Issue to the IRS
In addition, you’ll need to address the tax identity theft fraud. If you received a letter from the IRS, Google the phone number on the letter to make sure it's legitimate. If it is, contact the number on the letter to find out what to do next. But if it seems fishy, you can contact the IRS for specialized assistance at 800-908-4490.
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You’ll also need to complete IRS Form 14039, Identity Theft Affidavit if you attempt to file an electronic tax return and the IRS rejects it or if the IRS instructs you to do so. You can also fill out this form if you’re a victim of identity theft, but not specifically tax identity theft. You can mail or fax the form.
If you can't file your return electronically because someone else already did, attach this form to the back of your paper tax return. Then mail it to where the IRS says you should normally file your return.
“The good news is you will get your tax refund. The bad news is it will take longer than normal because the IRS has to go through additional procedures to validate the tax return,” says Wright. The process is slow and can take months to fully resolve.
Sadly, there are many others going through the same process, so the IRS isn’t working just on your fraud case.
The IRS may request by mail for you to provide additional information to prove your identity.
The IRS states that, “For those who are a victim, the IRS will work to verify the legitimate taxpayer, clear the fraudulent return from the taxpayer’s account and, generally, place a special marker on the account that will generate an Identity Protection PIN each year for the taxpayer who is a confirmed victim.
The IP PIN adds another layer of protection for the taxpayer’s Social Security numbers, and a return cannot be filed electronically without it once the taxpayer is in the program.”
Do You Need an Expert to Help?
It’s not required to have an expert help you get everything sorted out. However, many people may feel more comfortable having an experienced adviser on their side. Technically, it’s possible to perform all of the requested steps yourself. The forms aren’t complicated. However, the overwhelming feeling of violation may prevent you from thinking straight.
Ultimately, do what’s best for you to get the process handled quickly so you can return to life as usual. Sadly, tax refund fraud is a major problem. Hopefully, you never experience this. If you do, at least you now know what to do to take care of it.