Signs You May Be a Victim of Tax Fraud

As if we didn’t have enough fraud episodes to worry about, there’s a growing trend in income tax fraud. A thief will use your income tax return to steal your identity – and sometimes a whole lot more.

Identity theft and fraud are messy enough by themselves, but when you add complications with the Internal Revenue Service to the mix, things get really scary, really fast!

How Does Tax Return Fraud Work?

You may be wondering why anyone would want to file your income tax return as part of a scheme to still your identity – after all, it’s both 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, then files a tax return as if he were you. The fraudulent return is filed very early in the year, well before you are likely to file. In preparing the return, the thief will often create bogus W-2 forms that will show excessive withholding in order to create a very large refund. The refund can be direct deposited into the thief’s bank account, which he will then shutdown shortly after tax season – or his enterprise – comes to an end.

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 you will generally be unaware of the theft until you file your return. You file your tax return then 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 at the end of the day 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

If you are a victim of tax fraud one of the first signs is that you will not be permitted to file your tax return electronically. The IRS will report that a return has already been filed under your Social Security number.

If, according to your real tax return, you actually 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 obvious issue that tax returns were filed under your name and Social Security number for the same year, or that there is a discrepancy resulting in a greater tax liability for you.

In some cases, the thief will use your tax return to establish identity for employment purposes. If this is case, you may receive either a W-2 or a 1099 from an employer that you have never worked for. The IRS may also contact you indicating 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 more quickly you move the better it will go for you. The individual facts of your case will contain different variables, but there are three steps that you should take as soon as you become aware of the problem.

File a police report.

You will file a police report with your local police department, just as you would do 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, and
• It will give you an official document from a recognized legal authority that will help you in moving forward at other steps in the process.

It’s important that you file this report immediately, as it will also help your case with both the IRS and with the credit reporting agencies.

Contact the IRS.

Contact the Identity Protection Specialized Unit of the IRS (or by phone at 800-908-4490). They will direct you to complete Form 14039, IRS Identity Theft Affidavit to get the process going.

Even though someone else has collected a refund under your identity, you will likely get your true refund as the IRS will not hold you to blame due to a criminal act 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 – Trans Union, Equifax and Experian. You will have to report the theft of your identity, as well as to 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 your credit). This will prevent the identity thief 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.

Don’t relax after contacting the IRS.

It’s extremely important that you take action the moment you become aware that you may be a victim of tax fraud. Never, ever ignore this simply as a refund grab, as it can lead to much bigger problems later. There would be nothing worse than having to deal with tax fraud with the IRS, then having to turn around and once again try to clear your name with a set of financial institutions that have been scammed by the thief that is using your identity. Identity theft can take weeks of time to clean up in order to your name. Don’t stop with just talking to the IRS; make sure you stay on top of the other facets of identity theft as well.