As the 2013 tax filing season opened, the IRS announced a national crackdown on identity theft schemes aimed at stealing taxpayers' refunds.
The tax agency announced there were 734 enforcement actions in January of this year, including indictments, search warrants, complaints and arrests. This follows 2,400 enforcement actions against identity thieves in fiscal 2012.
The crime has trapped scores of innocent taxpayers. Here is a description of how tax identity theft works, along with eight steps you can take to help protect yourself from the devastating results.
Are You Located in a "High-Risk" Area?
In addition to criminal actions taken to reduce tax identity theft, the IRS conducted a special compliance effort starting on January 28 to visit 197 money service businesses to help make sure the businesses are not assisting identity theft or refund fraud when they cash checks. The compliance visits occurred in 17 high-risk places identified by the IRS covering areas in and surrounding:
- New York,
- Los Angeles,
- San Diego,
- El Paso,
- San Francisco,
- Oakland and
- San Jose.
Tax ID Theft Nightmares
Here are just a few of the tax-related identity theft nightmares reported in the media recently:
- A south Florida hospital employee allegedly stole patient Social Security numbers and birth dates in order to participate in a tax ID theft scheme. The employee passed the data onto another individual in exchange for a cut of fraudulent refund money received.
- The grieving father of a 4-year-old deceased Virginia girl learned a tax return was filed with her Social Security number when he filed his return. The father believes his daughter's personal information may have been sold online after her death.
- A Maryland woman was contacted by the branch of a national tax preparation service that provides "refund anticipation loans." Apparently, someone filed a tax return in her name and took a loan for $1,000. The tax preparation service contacted her to repay the loan when an IRS refund wasn't issued to cover it.
A Typical Tax ID Crime
An identity thief generally uses a legitimate taxpayer's identity to fraudulently file a tax return and claim a refund. The identity thief uses a stolen Social Security number and other identifying information to file a forged tax return and attempt to get a fraudulent refund early in the filing season.
In these schemes, there may be another victim. The Employer Identification Number (EIN) of a real organization could be fraudulently used to report fake earnings and withholding. The IRS may issue a refund to the thief before it realizes that there is no matching, legitimate paperwork from the employer.
The real taxpayer may be unaware that tax identity theft has occurred until he or she files a return later in the filing season. The individual may discover it after receiving a letter from the IRS stating that:
- More than one tax return was filed.
- There is a balance due, refund offset or collection actions were taken against the person for a year he or she did not file a tax return.
- IRS records indicate the individual received wages from an employer -- yet the taxpayer is unaware of them.
When this type of tax identity theft fraud occurs, an individual's refund can be delayed for months or longer while the IRS unravels who is legitimate.
The number of tax-related identity theft cases has increased substantially in recent years, according to the IRS Taxpayer Advocate Nina E. Olson. In her latest annual report to Congress, issued last month, Olson stated that identity theft case receipts increased by more than 650 percent from fiscal year 2008 to 2012. At the end of fiscal year 2012, the IRS had almost 650,000 identity-theft cases in its inventory servicewide.
The IRS has faced criticism in its handling of identity theft cases from many fronts, including the Taxpayer Advocate. In her latest report, she stated "the IRS has failed to provide effective and timely assistance to victims of identity theft" and that a victim "is often sent on a journey through IRS processes and procedures that may take years to complete."
The report added:
"The victims of tax-related identity theft suffer extraordinary inconveniences and, in many cases, hardships. In general, more than 75 percent of U.S. taxpayers receive refunds, with the amount averaging about $3,000. Identity theft victims generally cannot receive their significant and sometimes urgently needed tax refunds until the IRS resolves their cases, which is now taking six months or longer. The IRS's failure to provide timely relief to these identity theft victims is simply unacceptable."
Last summer, the Treasury Inspector General for Tax Administration (TIGTA) issued a report stating the IRS' difficulty in detecting tax-related identity theft stemmed from:
- Delayed access to third-party income and withholding information - Third parties are not required to submit income and withholding documents to the IRS until March 31, yet taxpayers can begin filing returns in mid-January. (This year, the beginning of filing season was delayed until January 30 due to the "fiscal cliff" legislation enacted on January 2.)
- The use of direct deposits, including debit cards, to claim fraudulent tax refunds - "Direct deposit provides the ability to quickly receive fraudulent tax refunds without the difficulty of having to negotiate a tax refund paper check," TIGTA noted. Tax refunds provided by the IRS on debit cards allow a thief to make ATM withdrawals or spend the money on purchases at stores.
What Can You Do to Protect Yourself?
There is likely no way to fully protect yourself from tax related identity theft but there are steps you can take to minimize the changes and reduce the damage if you do become a victim:
1. Don't carry your Social Security card or documents with your Social Security number.
2. Don't give out your Social Security number to businesses or medical providers just because they ask for it. Give it only when required.
3. Protect your financial information. Shred documents with personal identifying information. Don't provide information in response to e-mail or text messages. Don't give personal information over the phone unless you have initiated the contact or you are sure you know who you are dealing with. Secure personal information in your home.
4. Check your credit report every 12 months.
5. Protect personal computers by using firewalls, anti-spam/virus software, update security patches, and change passwords for Internet accounts.
6. File as early as possible in the tax filing season.
7. Respond immediately if you receive a notice from IRS. If you believe someone may have used your Social Security number fraudulently, notify the IRS by responding to the name and number printed on the notice or letter. You need to fill out the IRS Form 14039, Identity Theft Affidavit.
8. If you are a victim, get an Identification Number from the IRS that proves you are the legitimate filer of future tax returns. The IRS issues Identity Protection Personal Identification Number (IP PIN) to select identity theft victims whose identities have been validated by the IRS. It allows legitimate returns to be processed, and prevents processing of fraudulent returns, thereby mitigating processing delays in victims' federal tax return processing. Generally, the IP PIN is mailed out once the taxpayer's account has been resolved. Current programming allows one IP PIN to be generated each year.
If you have questions about your situation, contact your tax adviser or visit the IRS website for more information.