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…
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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 scary, real 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 steal 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 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 large refund. The refund can be directly deposited into the thief’s bank account, which they will then shut down shortly after tax season – or their 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 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, 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 greater tax liability for you.

In some cases, 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 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 you should take as soon as you become aware of the problem.

File a Police Report

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.
  • 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 – TransUnion, 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 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.

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 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 once again try 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 of time to clean up in order to clear 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.

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About Kevin Mulligan

Kevin is a debt reduction champion with a passion for teaching people how to budget and build wealth for retirement. He’s building a personal finance freelance writing career and has written for, Good Financial Cents, Moolanomy, and many others.

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  1. steveark says

    I was one of thousands of victims of pandemic unemployment benefits fraud. I was already retired and suffered no unemployment but someone filed for it in my name. When I got a notice that I needed to appear at the employment office to verify my identity I realized fraud had occurred. Fortunately it was fairly easy to take the necessary steps to report the crime, which were similar to what you have recommended for income tax fraud. We all think this kind of thing happens to someone else, until it happens to us! Good of you to share useful information.

  2. Ana Paura says

    My mom was a victim of identity theft in the 80’s. We suffered as a family from this. It was so bad that the Social Security Administration issued my mother a new Social Security Number. I always wondered how extreme her situation had to of been for this to be the actual solution to a horrific nightmare.

  3. Anton Ivanov says

    My friend was able to file her tax return this year without problems, but it will be interesting to see how the IRS combats this problem in the long-term. What’s troubling is how readily available your basic personal information, including your SS# is in the military. I can say from personal experience that I have put down my information on countless documents, which are fairly easy to get to. And it doesn’t take much at all to file a fraudulent tax return.

  4. Anton Ivanov says

    This exact misfortune happened to a very close friend of mine last year. Luckily the identity theft stopped at the fraudulent tax return, but Kevin is right to advise contacting the credit reporting agencies and placing a credit watch on your name if you are a victim. Just to give you a perspective, it took roughly 1 year to my friend to receive her rightful tax return money.

    • Ryan Guina says

      That is a horrible situation; I’m sorry your friend had to go through it. Hopefully your friend was able to have her return flagged by the IRS for future tax returns. Someone I know experienced fraud on his return and the IRS flagged his account for future returns so they could verify the information before sending a return. I’m not sure exactly how it works, but he feels safer about the situation now.

  5. Brick By Brick Investing | Marvin says

    All great tips! I had a buddy who unfortunately fell victim to this and it literally turned his life upside down. Better to prevent it than try to clean up the mess.

    • Ryan Guina says

      Ouch! That had to be a nightmare! Unfortunately, you can only do so much to protect yourself from this type of fraud. It’s too easy for criminals to get social security numbers and file a false return. It’s a multi-billion dollar problem, and one I hope the IRS is able to solve in the near future!

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