Identity theft is a big enough disaster all by itself. Still, when it brings us closer to the Internal Revenue Service, that adds a whole other dimension to the picture. Yet if you are a victim of identity theft, there is a growing chance that it will have its origins in tax fraud.
Table of Contents
- How Does Tax Return Fraud Work?
- How to Know If You Are a Tax Fraud Victim
- What to Do If You Think You Are a Victim of Tax Fraud
- Remain Vigilant Going Forward
How Does Tax Return Fraud Work?
You may wonder why anyone would want to file your income tax return as part of a scheme to steal your identity. After all, it’s more complicated and time-consuming than simply stealing a credit card or a bank account statement and using that to some advantage. But income tax fraud is identity theft with a twist and one that can be very profitable for the thief.
In tax fraud, the thief obtains your name, address, and Social Security number and then files a tax return as if he were you. The fraudulent return is filed early in the year before you are likely to file. In preparing the return, the thief often creates bogus W-2 forms showing excessive withholding to create a large refund. The refund can be directly deposited into the thief’s bank account, which they will shut down shortly after tax season – or their enterprise – ends.
The thief can make many thousands of dollars by filing multiple income tax returns on different taxpayers in a very short amount of time. And if he chooses, he can use your name, address and Social Security number to find other ways to profit from the theft.
The beauty of this fraud for the con artist is that you will generally be unaware of the theft until you file your return. You file your tax return and wait for a response from the IRS – only to have the IRS deny your refund claim because someone else has already filed using your information. By the time you learn of this, the thief is long gone.
Other types of fraud, like stealing your credit card number, may be caught very quickly by the credit card industry’s servers, and it doesn’t cost you anything. On the other hand, this fraud can cost you thousands of dollars and a lot of pain in dealing with the Internal Revenue Service.
How to Know If You Are a Tax Fraud Victim
The first time you find out that you are a victim of tax fraud usually occurs when you try to file your return electronically. Because another return has already been filed under your name and Social Security number, the IRS will deny your attempt to file electronically.
If you can file your tax return, you may discover the theft through a letter from the IRS. The letter could indicate any one of the following:
- That multiple income tax returns were filed for the same year,
- W-2s or 1099s were filed for the tax year in question that didn’t appear on a specific tax return, or
- that there is a discrepancy in the amount of tax you owe on one or both tax returns.
If — according to your actual tax return — you owe money, you may not find out about the tax fraud until you’re contacted by the IRS directly. The letter may indicate several different scenarios, including the apparent issue that tax returns were filed under your name and Social Security number for the same year or that a discrepancy results in greater tax liability for you.
Sometimes, the thief will use your tax return to establish an identity for employment purposes. If this is the case, you may receive either a W-2 or a Form 1099 from an employer you have never worked for. The IRS may also contact you, indicating that you have received wages from these employers.
What to Do If You Think You Are a Victim of Tax Fraud
If you suspect tax fraud, the quicker you move, the better it will go. The individual facts of your case will contain different variables, but there are three steps you should take as soon as you become aware of the problem.
File a Police Report
The first order of business will be to file a police report. Tax fraud is a crime and needs to be reported as such. By filing the report, you’ll create an official record of the crime and effectively “date stamp” the event. You can then take the police report and use it in your next steps.
File a police report with your local police department, just as you would for a more ordinary case of identity theft.
The report will serve at least three purposes:
- It will create an official record of the event.
- It will establish a firm date of discovery on your part.
- It will give you an official document from a recognized legal authority that will help you move forward at other steps in the process.
You must file this report immediately, as it will help your case with the IRS and credit reporting agencies.
Contact the IRS
Immediately after filing a police report, you need to contact the IRS. Go to the Identity Protection Specialized Unit on the IRS website (or by phone at 800-908-4490) and follow the steps.
One of the most important steps will be to file IRS Form 14039, IRS Identity Theft Affidavit. You can file that with the IRS and a copy of the police report.
Even though someone else has collected a refund under your identity, you will likely get your actual refund, as the IRS will not blame you for the criminal activity undertaken by someone else in your name.
Contact All Three Credit Bureaus
The fact that a tax refund has been claimed from your name is only one possible scenario for tax fraud. Even if you clear up everything with the IRS, you’ll still have the matter of your outstanding Social Security number in the hands of the thief. This will be a long process that will begin with your contacting all three credit repositories – TransUnion, Equifax and Experian.
You will have to report the theft of your identity and ask for a notation that no credit can be obtained without contacting you directly (it’s a good idea to put a credit freeze or fraud alert on your credit). This will prevent the identity thief from obtaining credit in your name.
After that, you can assess how far the thief has gone in using your identity and what other steps may be necessary to restore your identity.
If you’re lucky, the thief was interested only in obtaining a refund in your name. But since he already has your Social Security number and other important information, he can still use it either to obtain credit or to sell it to another thief who will use it in much the same way.
Remain Vigilant Going Forward
Sadly, if you have been the victim of tax fraud once, it can happen again. You must do whatever you can to keep your information from falling into the wrong hands.
You must take action when you become aware that you may be a victim of tax fraud. Never ignore this as a refund grab, as it can lead to much bigger problems later. There would be nothing worse than dealing with tax fraud with the IRS, then having to try again to clear your name with a set of financial institutions that have been scammed by the thief using your identity. Identity theft can take weeks to clear your name. Don’t stop by just talking to the IRS; make sure you stay on top of the other facets of identity theft.
Do your returns yourself, or have a CPA do it for you
It’s possible that your tax information could be compromised by a fly-by-night tax-preparation service. Identity theft is often an inside job undertaken by trusted employees to protect your information. If this is a concern, either prepare your tax returns yourself or hire a reputable CPA to do it for you.
Be careful to who you give your social security number and tax returns
Unfortunately, it often seems as if the whole world wants our Social Security number or our income tax return for one purpose. Resist that to the greatest degree possible. Your Social Security number should only be given to your bank, employer, and the Department of Motor Vehicles. There are few entities beyond these three that seriously need it. And never – ever – provide your Social Security number or other sensitive information in response to a phone call or an email. Anyone who needs this information already has it and shouldn’t be asking for it. (Here is an example of an IRS phishing scam).
Keep your tax information under lock and key
Your home or office could have been where the identity thief got your information. Your income tax returns, and any documents that include your Social Security number or other sensitive information, should be kept to a minimum and under lock and key. Never store essential documents in a place where anyone can get them. If you have any other concerns regarding tax fraud or anything else in the realm of taxes, read our complete Tax Guide.