Criminals are filing more fraudulent tax returns each year, using others’ social security numbers to trick the U.S. government into issuing refunds they don’t deserve. Anyone can fall prey to tax return theft, which causes serious problems ranging from significantly delayed refunds to countless hours of extra paperwork and phone calls to the IRS. Even worse, tax refund theft victims’ credit scores can be severely affected.
Taxpayers don’t have to wait to fall victim to tax return theft to do something about it. There are steps people can take to defend themselves against this rapidly growing problem.
The IRS ranked tax refund fraud as its number one scam for 2014, and incidents of the crime rose 66% from 2012 to 2013. The US Government Accountability Office reports that in 2013 alone, tax return thieves stole more than $5 billion from the U.S. Government, with over a million and a half taxpayers affected.
According to news station KSL in Utah, the crime has become so easy that drug dealers, gang members, and other organized criminals who once relied on violence and guns are now turning instead to laptops and online transactions.
How Does Tax Return Theft Work?
When a criminal steals a social security number and uses it to file a fraudulent return, the IRS has no way of knowing that it’s not legitimate. When the taxpayer later files the real return, IRS records show a duplicate, which generates a letter from the IRS, informing the victim of the problem. According to the Journal of Accountancy, the thieves file false tax returns early in the tax season, giving them a jump on honest taxpayers. This works for criminals because many taxpayers wait until the filing deadline of April 15th to file their legitimate tax returns.
Regina (surname and other personal information withheld) hadn’t received a tax refund in two years. Being a busy mother of two, it took some time for her to ask her tax preparer what was going on.
“She said someone was filing fraudulent tax returns with my husband’s social security number. I was upset because I thought, why didn’t the IRS see the person wasn’t at the address we’ve lived at for 15 years? It took us months to get the mess cleaned up. Once it happens you have to deal with it for the rest of your life.”
While the victims are dealing with the fallout, the crooks are spending the tax refunds that were sent by check or wired to their accounts by the government.
How the IRS is Fighting Tax Return Theft
The IRS prevented $24 billion in tax return theft in 2013 by passing returns through various filters intended to catch the criminals, and by devoting extra IRS employees to the problem. However, the U.S. Justice Department says the crimes are hard to prosecute because they’re often carried out by large criminal organizations that exploit the anonymity and speed of automated systems, such as databases that store personal information and IRS e-file services.
Further, the biggest problem is, there’s no real authentication. For example, Alan Crenshaw’s employer sent a copy of his 2013 W-2 to the IRS in March. By then, a fraudulent return had already been filed using his social security number and a forged W-2. The Government Accountability Office has reported that if the IRS had access to W-2 data earlier in the year, it could head off billions more dollars lost annually through fraudulent refunds.
How Tax Return Theft Hurts Taxpayers
1. Time is Money. When a taxpayer’s refund is stolen, it often takes months before the IRS gets the problem sorted out. According to the Treasury Inspector General for Tax Administration, it took the IRS an average of 312 days to resolve tax return theft cases in 2011 and 2012. That’s because each case must be investigated by the IRS.
2. Black Marks on Credit Reports. Confusion at the IRS can cause tax liens, penalties, and other punitive measures that can hurt taxpayers’ credit scores.
3. Frustration and Worse. IRS Publication 4535 reports that tax return theft victims must often spend months or even years trying to convince the IRS that they’ve been victimized. During this time, people can lose or be refused opportunities for loans, jobs, housing, cars or education. The publication warns that they can even be “arrested for crimes they didn’t commit.”
How to Avoid Tax Return Theft
The IRS offers a list of tips for avoiding tax identity theft, such as not carrying social security cards in the wallet or purse, and not giving out personal information over the phone.
While the advice itself is sound, it doesn’t speak to the method by which most social security numbers are stolen. Namely, the U.S. Department of Justice says social security numbers can be stolen from anywhere, including hospitals and nursing homes, or any business that requires their customers to furnish the numbers in order to receive service. This could include tax preparation services, and in fact Forbes reports that a North Carolina man broke into one of Jackson Hewitt’s offices and stole 300 files of client information, using them to conduct tax refund fraud.
Since so many businesses and organizations require social security numbers, protecting them may not be feasible. The following methods, however, can prevent the theft of tax refunds:
1. File early. File Electronically. Taxpayers who submit their taxes early can preempt identity thieves. The IRS will then reject any further attempts at filing a return for them. Filing electronically ensures the return is processed swiftly, with electronic returns accepted instantly, compared to six weeks or more to process a paper return.
2. Get an IRS IP PIN Number. The IRS can issue a private PIN number (different from an e-file PIN) that protects a taxpayer’s IRS account. Once issued, the IRS assumes that any tax return filed without this PIN is fraudulent.
The IRS Identity Protection Web Page says only those who’ve already been defrauded, and/or invited by the IRS can get an IP PIN. However, a call to the IRS reveals a loophole. Those wishing to receive an IP PIN before they’ve been defrauded may do so by filling out IRS Form 14039 — the Identity Theft Affidavit. This form states that it’s for identity theft victims or “potential identity theft victims.” Since a “potential victim” includes anyone whose social security number may possibly be stolen, this means everyone can file the form.
The bad news: All IP PINs for the year are issued before January 1st. That means anyone filling out form 14039 will have to wait until the following year to receive their PIN.
3. Defeat “Phishing.” Anyone who receives an email claiming to be from the IRS should never answer it. The IRS doesn’t send out emails. Any such emails should be forwarded to: [email protected]
4. Use Secure Connections Only. When using tax preparation software or e-filing, never use public Wi-Fi or an unprotected network. Wait until you are on a secure Wi-Fi network, such as at your home or office.
5. Watch Credit Reports. Keeping an eye on credit reports from the three credit reporting agencies (Equifax.com, Experian.com, Transunion.com) can tip off a taxpayer to suspicious activity, like the opening a P.O. box where a criminal can receive a fraudulent return. Alternately, a service like Lifelock.com or Identityguard.com can monitor reports from these three agencies continually, notifying customers about potential red flags.
6. Don’t Always Comply. Just because a hospital, a clinic, or a car dealer asks for a social security number, that doesn’t always mean consumers are always required to provide the information. The Journal of Accountancy suggests people resist giving out SSNs whenever possible.
What to Do if Your Tax Refund is Stolen
The Federal Trade Commission says a taxpayer can tell if they’ve been victimized by refund theft if their return is rejected by the IRS, with a letter stating that a duplicate return has already been filed. Alternately, an unexpected letter from the IRS can alert taxpayers that someone else is using their identity. According to the IRS, victims of tax return theft should:
1. Respond to notices from the IRS immediately. Waiting will only give the damage time to spread. Call the IRS Identity Protection Special Unit at 800-908-4490.
2. Report the theft to the FTC’s website ftc.gov/complaint or by calling them at 877-438-4338. (TTY 866-653-4261)
3. Report the theft to local police. Ask for a copy of the police report, for use when working with the IRS to resolve the problem.
4. Complete IRS Form 14039, the IRS ID Theft Affidavit. Include proof of identity, like a photocopy of a driver’s license, social security card, or passport. Also include a copy of your police report.
Filling out Form 14039 lets the IRS know if someone’s been the victim of tax return theft, or if they could potentially become a victim. In response, the IRS will most often issue an Identity protection PIN number (IP PIN) to the victim, for use when filing future tax returns. They’ll also assign a taxpayer advocate to help the victim clear up any damage, such as missing or late tax returns or tax liens placed as a result of the theft.
5. Close any affected accounts, like credit card or bank accounts.
6. Keep records of all documents and correspondence, including those sent to you by the IRS, or calls you’ve made and letters you have sent.
7. Place a fraud alert on one of your credit reports. A fraud alert makes it harder for identity thieves to use your personal information to open bogus accounts. It lasts 90 days and is renewable. A report created with any of the three credit reporting bureaus (Equifax.com, Experian.com, or TransUnion.com) will propagate to the other two agencies.
8. Order credit reports, and go through them to see if any other fraudulent activity has been carried out in your name.
In a Nutshell
Tax return theft is growing fast, and the fallout can be frustrating at best, requiring taxpayers to jump through countless hoops just to get their financial lives back to normal. However, people can protect themselves by filing early, filing electronically, and by filling out IRS Form 14039 to apply for an IRS IP PIN number.