Understanding Tax Identity Theft
You’ve probably heard the saying, “the early bird gets the worm,” but what does that mean for Americans who file their tax returns early? To most of us, it usually means quicker refunds. But early filing could also mean significantly reducing your chances of falling victim to a growing trend in identity theft. It’s called tax return identity theft and it’s affecting Americans at an alarming rate. In fact, according to the IRS, approximately 1.5 million returns were considered fraudulent in the 2016-17 tax seasons with estimates of $1.7 to $2.3 billion stolen in 2016 alone.* Not to fret! We’ll help you understand tax related identity theft, the signs to look out for and what to do if it happens to you.
What Is Tax Identity Theft?
Tax return identity theft is the act of filing a return using a stolen identity and taking the victim’s refund. It’s the third largest theft of federal funds, following Medicare and federal unemployment benefits.** Equipped with three simple ingredients — a name, birth date and Social Security number — the thief can commit tax fraud resulting in delayed or stolen refunds. And while a swiped refund may seem like a worst-case scenario, thieves may also use your stolen identity to obtain employment, an act with even greater impact. When an identity thief uses your SSN for employment, all the income they earn under your identity must be reported. Meaning that when you go to file your taxes and the earned income numbers don’t match, the IRS will flag your return as suspicious. This can have significant financial impacts if taxes on the unclaimed earnings are imposed and can lead to prolonged stress with a request to audit your taxes.
The victims of fraudulent tax return identity theft can face stressful obstacles on their path to recovering from a stolen tax return and identity theft. One of the most significant steps in protecting your financial future from being compromised is education and understanding how this type of theft occurs, and what to do if you find yourself in this situation.
How Does Tax Identity Theft Occur?
You’re likely asking, "how can tax identity theft occur?" It can occur anytime of the year, in or out of tax season, with February and March showing a significant rise. Tax related identity theft occurs in a variety of ways, like losing a wallet or purse, lost or stolen mail and discarded documents left un-shredded. But perhaps one of the most common avenues thieves use to snag your identity is through exposed databases, revealing sensitive information from a collection of website users. As more of our daily activities are conducted online, we’ve increased the frequency of sharing our most sensitive information — information hackers can sell online.
What to Do If You’re a Victim of Tax Identity Theft
The first indication that you've been a victim of tax return identity theft is a freeze on your return until the IRS can confirm your identity. If a return has already been filed using your SSN, and you try to file electronically, you will be notified of a rejection. If you file a paper return, you will get that rejection letter via mail.
If your stolen identity was then used to obtain employment, you could find yourself subject to state and federal enforcement actions for unreported income.
What steps should I take if I'm a victim of a stolen tax return?
If you or someone you know have fallen victim to tax identity theft, you'll need to report it to the IRS as soon as possible. If your electronically filed or paper return is rejected, here are some of the steps you may wish to take:
- Respond immediately to any IRS notice you receive
- Fill out the 5071C form the IRS may include with your suspicious or fraudulent return rejection
- Download and complete IRS Form 14039, Identity Theft Affidavit to notify the IRS of the identity theft, print the completed document and attach it to your return according to instructions
- Add an Identity Protection PIN to your SSN
- Notify the Federal Trade Commission through IdentityTheft.gov
- Contact your state tax agency in the event your state has specific identity theft protocols
How to Prevent Tax Identity Theft
Though identity theft may not be completely preventable, there are several strategies to significantly reduce your risk. Let’s look at some common tactics to help ensure tax season goes smoothly:
- Know the signs of identity theft
- File your return early
- Use complex passwords for any online activity
- Use trusted, reputable tax professionals to file
- Send returns through certified mail if you prefer a paper return
In a world of increasing digital exposure, the likelihood of sensitive data being stolen is very real. Identity theft occurs every day. Breathe a sigh of relief knowing you can be covered by adding our credit protection and monitoring program, along with identity theft fraud protection.
*Data collected from an article in The Journal of the American Taxation Association, Vol. 42, No.1, pp 79 citing IRS findings in 2018
**Examples based on an article published in Accounting and Finance Research, Vol.3, No. 1, 2014
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