What Is Tax Fraud? And Should I Be Worried About It?

Question: My husband does our taxes every year, but I’ve been seeing all these stories lately about tax fraud. When I try to bring it up, he tells me not to worry. .

He says it’s just a bunch of companies trying to scare people into buying protection services. He points to all those identity theft commercials on TV, where they tell you it’s the most horrible problem ever. Then they tell you to pay them $20 a month to solve it.

I don’t know what to think. I don’t even know enough about this to know if he’s right. So, what is tax fraud and what do you think? Is my husband right that this is basically just scare tactics to make a quick buck?

— Cindy in Oregon

Howard Dvorkin answers…

Before I tell you what I think, Cindy, let me tell you what I know: Identity theft and tax fraud are very real and very big problems.

So, your initial question is what is tax fraud. It’s basically a type of theft related to Social Security identity theft. Someone steals your Social Security number, then files taxes in your name. They get your tax refund and when you try to file, the IRS tells you that you already have.

But let me impress upon you and your husband: Identity theft is the most pervasive crime in this country. Tell me another crime that affects more than 12 million Americans a year, according to statistics compiled by Debt.com.

Now let’s address your husband’s excuse for not taking tax fraud seriously. Yes, there are companies out there that advertise their services to protect you from identity theft. Thankfully, most are reputable, from LifeLock to one that Debt.com partners with.

I don’t agree with “scare tactics” in advertising, precisely because they make people like your husband skeptical or numb to the problem. However, it’s a big mistake to ignore tax fraud. Let’s discuss why…

What is tax identity theft?

As Debt.com wrote earlier this year, “Tax identity theft is committed when a criminal files a tax return in your name, with the hopes of stealing your refund.” There are numerous ways they do this, and they’re always changing and evolving.

In fact, the IRS just recently warned tax preparers “to step up security and beware of phishing emails that can secretly download malicious software that can help cybercriminals steal client data.”

How does this new scam work? It’s brazen, says the IRS…

In a new twist, the fraudulent returns in a few cases used the taxpayers’ real bank accounts for the deposit. A woman posing as a debt collection agency official then contacted the taxpayers to say a refund was deposited in error and asked the taxpayers to forward the money to her.

That’s right, the criminals actually steal your identity from your tax preparer, file a fraudulent return, and put the refund in your own account. Then they pose as IRS agents or police and insist the deposit is an error – and order you to return it.

As Forbes describes it, this scam works because, “Unlike previous variations on the scams, there is ‘proof’ that the call from the alleged IRS representative is for real: The taxpayer typically does have a bogus tax refund in his or her bank account.”

What you can do to protect yourself

There are three tactics that can help you avoid this kind of tax fraud. First, file your taxes soon as you can. You basically want to beat the bad guys to the punch. They can’t file for you if you’ve already done it.

Second, the IRS offers a refund tracking service. Check it out. It’s free. Third, you can e-file your taxes, which requires a PIN.

Whatever you do, Cindy, tell your husband: Doing nothing is dangerous.

Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.