Keeping Your Balance: A guide to tax return identity theft

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Every year there are an increasing number of cases of identity theft. With more people filing their tax returns electronically, the incidences of tax related identity theft have also increased. The IRS has worked to prevent such thefts, and their records show that they have stopped nearly 20 million potentially fraudulent refund claims over the past 4 years, involving over $60 billion in false refunds.

However, even as the IRS has assigned thousands of employees to investigate and prosecute identity thefts, more than $5 billion of fraudulent refunds were paid in 2013, and the problem is still growing, potentially reaching tens of billions of dollars per year. As the problem continues to grow, the IRS recently announced that to combat tax identify theft, their criminal investigations division has established a cybercrime unit. However, congressional budget cuts continue to erode the IRS’ ability to counter the growing problem.

According to the IRS, tax-related identity theft occurs when someone uses your stolen Social Security number and fake W-2 information to file a tax return claiming a fraudulent refund. Generally, an identity thief will use your SSN to file a false return early in the tax filing season, often before W-2s are required to be issued to taxpayers. By the time the IRS has their copy of the W-2, approximately half of all refunds claimed have already been paid.

Matching W-2s and the tax return data is not possible early in the tax filing season. In order to make the tax filing system easy for taxpayers to utilize, it has also made it difficult to prevent and uncover fraud. This has created a low-risk, high-reward situation for those looking to exploit the system.

Unfortunately, you will not even know that you are a victim of identity theft until you try to file your taxes and the IRS informs you that someone has already filed a tax return using your SSN. The IRS will then reject your tax return and refund claim because your SSN already has been used.

Other warning signs of tax related identity theft include an IRS notice or letter that states:

• More than one tax return was filed using your SSN;

• You owe additional tax, had your refund offset or have had collection actions taken against you for a year you did not file a tax return;

• IRS records indicate you received wages from an employer unknown to you. You can get this information online at www.irs.gov/Individuals/Get-Transcript.

If you discover you have been a victim of identity theft you should take the following steps:

• File a report with law enforcement.

• Report identity theft at ftc.gov/complaint (you can get additional information at identitytheft.gov).

• Contact one of the three major credit bureaus to place a ‘fraud alert’ on your credit records:

n  Equifax, www.Equifax.com, 1-800-525-6285

n  Experian, www.Experian.com, 1-888-397-3742

n  TransUnion, www.TransUnion.com, 1-800-680-7289

• Contact your financial institutions, and close any accounts opened without your permission or tampered with.

• Check your Social Security Administration earnings statement annually. You can create an account online at www.ssa.gov.

If your SSN is compromised and you know (or even just suspect) you are a victim of tax-related identity theft, take these additional steps:

• Respond immediately to any IRS notice.

• Complete IRS Form 14039, Identity Theft Affidavit. The fillable form can be found at IRS.gov. There are separate sections for identity theft which affect your tax records, and for events that may impact your tax records in future years. Complete the appropriate section, print the form and send to the IRS according to instructions by mail or fax.

• And, of course, continue to pay your taxes and file your tax return, even if you must do so by paper rather than e-filing.

If after all of the above, you still do not have a resolution and had previously contacted the IRS, you can contact the IRS Identity Protection Specialized Unit at 1-800-908-4490.

Of course the best approach is to reduce your risk and avoid the potential problem. Based on 2013 data, it took the IRS nearly nine months to resolve the average identity theft case. The IRS website advises:

• Don’t routinely carry your Social Security card or any document with your SSN on it.

• Don’t give a business your SSN just because they ask – only when absolutely necessary.

• Protect your personal financial information at home and on your computer.

• Check your credit report annually.

• Check your Social Security Administration earnings statement annually.

• Protect your personal computers by using firewalls, anti-spam/virus software, update security patches and change passwords for Internet accounts.

• Don’t give personal information over the phone, through the mail or the Internet unless you have either initiated the contact or are sure you know who is asking.

An unexpected email purporting to be from the IRS is always a scam. Be aware that the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. An unexpected phone call from someone claiming to be an IRS agent, either threatening you with arrest or deportation if you fail to pay immediately, is a scam.

In another variation, the caller requests your financial information in order to send you a refund. Report these calls and other IRS impersonation schemes to the Treasury Inspector General for Tax Administration at 1-800-366-4484 or online at IRS Impersonation Scam Reporting. If at any time you discover a website that claims to be the IRS but does not begin with ‘www.irs.gov,’ forward the link to [email protected].

Finally, not all data breaches or computer hacks result in identity theft and not all identity theft is tax-related identity theft. It’s important to know what type of personally identifiable information was stolen. For example, did a data breach compromise your credit card or did it compromise your SSN? If you’ve been a victim of a data breach, keep in touch with the company to learn what it is doing to protect you.

Burton S. Speer is a partner in the tax department at Mengel, Metzger, Barr & Co. LLP and can be reached at [email protected] or (585) 423-1860.