Identity theft related tax fraud occurs when an identity thief somehow obtains your name and Social Security number and uses this information to file a fraudulent tax return in your name. Tax fraud resulting from identity theft can affect individuals or businesses and often the same information can be used to ultimately commit tax fraud against both. There are many ways that identity thieves can steal your information including: phishing emails, snooping through your trash for intact documents, hacking into an entity that has your personal information, stealing or finding your wallet/purse, public WiFi monitoring, changing the designated agent of business entities and the list goes on.
Once your personal or business information has been stolen, identity thieves can use this information to file fraudulent tax returns to the IRS and other tax authorities in order to receive credits or refunds. The identity thieves prefer to have the funds distributed by the IRS in the form of a pre-loaded debit card or a direct deposit which helps them avoid having to deal with security measures related to cashing a paper check. After receiving money from the fraudulent filings the identity thieves will disappear, leaving the victim individual or business owner without their refund or with substantial bills owed to the tax authorities.
The most common issue people face is a delay of their anticipated refunds. When an identity thief files your tax returns before you do, the tax return you file yourself comes under suspicion as it is a second return filed for the same taxpayer. The IRS will require that you send them an IRS Identity Theft Affidavit (Form 14039) with proof of your identity in order to confirm that you indeed are the real taxpayer. This process can be lengthy and your refund will not be processed until you are confirmed by the IRS to be the actual taxpayer. Other consequences of this crime can be severe as victims can also be left to deal with any resulting collection actions, audits, and the possibility of fighting aggressive tax collection through the IRS appeals process.
In late 2012, after the IRS reported that it had identified 642,000 tax returns affected by identity theft, the United States Government Accountability Office's Director of Strategic Issues, James R. White, conducted a review and provided testimony as to why so many fraudulent returns are getting by the system. The Government Accountability Office (GAO) found that there were "several areas where the extent and nature of identity theft is unknown." First, the total number and cost of fraudulent returns is hard to determine because the IRS can count the number of identity theft related incidences they discover, but they have no accurate way of determining how many they are missing. Second, the IRS usually doesn't know the identity of the criminal unless they open a criminal investigation. Third, it is difficult determining whether a fraudulent return is part of a broader scheme as analysts cannot always identify indications of large tax identity theft schemes. Last, the characteristics of known identity theft returns are not as clear as the IRS would like as the agency does not currently track the characteristics of those returns.
This does not mean the IRS is sitting idly while allowing the fraudulent returns to be processed. The IRS developed the Internal Refund Fraud and Identity Theft Global Report (Global Report) to begin keeping track of information in their system related to identity theft incidents. IRS senior management will use this information to implement more protocols to reduce tax identity theft and it will be used as a source of information that can be sent to external entities requesting information. In addition, the IRS has already instated multiple protocols that began in 2012 or are slated to begin in 2013 as I have written about in an earlier article.
What you can do to minimize your risk of identity theft related tax fraud is to simply file your tax return first. This effectively turns the tables on the identity thief as your return will be accepted by the IRS and the criminal's fraudulent return in your name will be denied. Now it will be incumbent upon the identity thief to provide information proving that they are indeed you, which will most likely end their attempt to defraud you and the IRS. It is unclear when exactly the IRS will begin accepting returns this year as the delay in resolving the fiscal cliff may postpone the filing period a few weeks. Regardless of when the filing period begins, try to file your return as early as possible and you will be well on your way to avoiding tax fraud this tax season!
"The Importance of Filing Taxes Early" was written by Sam Imandoust, Esq. He serves as a legal analyst for the Identity Theft Resource Center. We welcome you to post/reprint the above article, as written, giving credit to and linking back to the original article.