Filing Taxes Early May Be the Best Way to Prevent Tax Refund Fraud

In this blog post, Carrie provides tips on protecting yourself from tax refund fraud, and what to do if you fall victim to tax identity theft.

Filing Taxes Early May Be the Best Way to Prevent Tax Refund Fraud

According to the Internal Revenue Service (IRS), tax refund fraud is expected to soar again this coming tax season, hitting a new record of $21 billion in 2016!  While there are a number of reasons for the increase in this kind of identity theft, the important thing for you to know is what actions you can take now to reduce your risk, and what to do if you are the victim of tax refund fraud.

Preventing Tax Refund Fraud

While the majority of identity theft is still focused on the financial sector, rather than tax refund fraud, the latter is often the easier of the two to pull off, as it only takes a name and social security number to file a fraudulent tax return.  Identity thieves can try to elicit this basic information from you through email phishing scams or even “dumpster diving” for your sensitive documents; and sophisticated criminal rings that operate tax fraud mills will seek out or purchase large lists of personal information, often stolen from databases maintained by employers, hospitals, or even nursing homes.  In addition, the numerous data breaches that have rocked large retailers and institutions over the past several years (think Target, Home Depot, eBay and even the IRS itself!) have exposed millions of Americans to the possibility of identity theft.  It almost seems that the theft of your identity at some point in your life is inevitable.  Given that the risk of identity theft is present at any point in our economic lives, what can you do to prevent a thief from using your personal information to file a fraudulent tax return?

  • File your tax return as early as possible.  This is probably the best move you can make to avoid tax fraud.  As soon as you receive your W-2s, 1099s and other documents, complete and submit your tax return (electronically) to the IRS.  If you can beat the criminals to the punch, and your legitimate return is filed first, any subsequent fraudulent return filings will be rejected.  The IRS will likely begin to accept filings in late January, so encourage your employer and other organizations that issue your tax documents to get it done early, allowing you to file before the criminals.

  • Do not provide any personal information to emailed requests, especially from emails that appear to come from the IRS.  The IRS will never contact a taxpayer by email, and the IRS will absolutely never request personal information from you by email.  Any email request masquerading as from the IRS is most probably fraudulent.

  • If you receive a phone call from someone claiming to be an IRS Agent, request the person’s IRS badge number immediately and contact the IRS independently to authenticate the badge.  The IRS will rarely contact a taxpayer by phone, and will do so only after many notices are sent via mail.

  • If you are not required to file a tax return, consider filing one anyway, in order to prevent a thief from using your social security number to file a fraudulent return.

  • If a member of your family has passed away during the tax year, file a final tax return for that individual as soon as possible, as thieves are notorious for filing returns for deceased individuals.  Surprisingly, social security numbers for deceased persons are easily accessible; and it takes the IRS many years to match up death records from the Social Security Administration in order to screen for tax filings by deceased persons.

  • If you believe you have been targeted for identity theft, report all suspicious activity (including emails and phone calls) to the Federal Trade Commission  at https://www.ftccomplaintassistant.gov/GettingStarted

Steps to Take If You are the Victim of Tax Fraud

Many of my clients think that they won’t be a victim, because they usually owe taxes (instead of receiving a refund).  But in truth, the thief doesn’t care – they are not stealing your actual refund.  They will use your social security number and then invent the rest of the information to create a refund.  So, whether or not we expect a refund, we all need to be vigilant and take appropriate steps.

If you find that you have been the victim of identity theft (either by a letter from the IRS or from your electronic tax return being rejected), take the following steps as soon as possible:

  • If appropriate, file your tax returns on paper.

  • File form 14039 with the IRS.  Before next tax season, you will receive a special IP-PIN that will allow you to file your tax return electronically.

  • Report the theft to the Federal Trade Commission at https://www.ftccomplaintassistant.gov/GettingStarted

  • File a report with your local police – while it is unlikely that your local police department will be able to solve the crime, this documentation can be used to accompany your notification to the IRS and other credit institutions that you have been the victim of identity theft, and can expedite their review of your case.

  • Generally, tax refund fraud is contained, and taxpayers do not necessarily find themselves victims of identity theft in other parts of their financial lives.  However, if you find yourself a victim of tax fraud, you should check your credit report to see if any new accounts have been opened without your consent, or any other fraudulent activity is taking place under your name.  As an extra layer of protection, consider placing a “fraud alert” with the three major credit rating bureaus.  This is a free service that lasts for 90 days (and is renewable), which will make it more difficult for an identity thief to open accounts in your name.