The New Year is time for fresh starts; New Year’s resolutions like eating better, dieting and even being more financially responsible. It’s also the beginning of tax season. So, while you may already be shirking your new workout schedule, the one thing you shouldn’t avoid is checking your mailbox (snail or electronic, depending on your company) for your W-2s, 1099s and other tax-related documents.
It’s important to be on the lookout for your tax forms mainly because other people are also on the lookout for them. Not their own, but yours, your neighbors’, or anyone else they would potentially steal information from in order to create fraudulent tax returns.
Tax-related identity theft is one of the top types of ID theft reported to the Federal Trade Commission each year. The number is even higher for those submitting fraud reports to the Internal Revenue Service (the agency that handles taxes).
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 and credit monitoring. Thankfully, most are reputable, from LifeLock to one that Debt.com partners with, Smartcredit.
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.
Ways of becoming a tax identity theft victim
Tax ID thieves have gotten quite sophisticated. You might get a call, and your caller ID will actually say it’s the IRS. Not only that, the caller might give a phony badge number but know the real last four digits of your Social Security number.
The caller will urge you to pay immediately to avoid further penalties or get arrested. Needless to say, the IRS doesn’t make phone calls threatening to drag you off in handcuffs in the next few hours. The caller will insist you wire them the cash or put it on a prepaid debit card. If you do so, your money is gone.
There are different ways of becoming a victim of tax-related ID theft. Here are the three most common:
Personal tax identity theft
Personal tax ID theft happens when someone has stolen your personal information in order to file a fraudulent return. This happens if someone uses your Social Security number for employment or they used the information from your W-2 to file income tax returns on your behalf and take your tax refund.
ID theft through a tax professional
This type of ID theft happens when fraudsters break into the secure systems of actual tax preparers and online tax preparing systems. This route gives them access to much more information than just one single person, making it a much larger tax-related fraud scheme. For tax-preparing software and systems, a fraudster could potentially just break into an individual’s account from a weak password.
Small business tax identity theft
This obviously targets small businesses and their employees. With the EIN number of a small business, identity thieves can not only file a fraudulent return for the business itself, but it can also create fake employees using stolen Social Security numbers and file tax returns through those. Lastly, if there is enough information available, they could even steal the information of the employees.
The biggest tax offenders: procrastinators
Most Americans aren’t concerned about tax fraud. That could be because they don’t know they are putting themselves at high risk though. One-third of Americans use two-factor authentication with their tax preparers. That means the rest of us stay with our password-only option. These aren’t actually protecting us. Scammers pick up our passwords easily, making our information more vulnerable.
The early bird may get the worm and the tax refund check sooner. They’re also saving themselves a huge headache. More than half of consumers will file in late March and into April. This is when tax scammers are spending the most time hunting for and stealing personal information. Not to mention their refunds.
Unfortunately, another big offender is ignorance. Half of all American taxpayers who use a preparation service aren’t sure how to evaluate them. Choosing a preparer blindly opens up a host of scamming opportunities. Whether you’re using an in-person service or an online tool, if you haven’t taken the steps to make sure they are authenticated and a real service, you may be handing your personal information (and your well-deserved refund!) over to scammers.
A few tricks to check if emails from your tax filing software company are legitimate:
- Double-check the sender’s email address. It may look correct, but if you cursor over it with your mouse you might find a completely different address.
- Don’t click on embedded links in emails. This can be an email phishing scam, where the link downloads software that will steal personal information from your computer. Type the address into your browser’s address bar if you want to visit a site.
- Don’t email personal or sensitive information. Your tax software provider will always ask you to input the information after securely logging in.
- Don’t call any customer service phone numbers you see in an email. You can visit your software provider’s official site to log in and double-check the customer service phone numbers.
Am I a victim of tax-related identity theft?
Question: My husband’s father owned a convenient store that he put under my husband’s name. His father didn’t pay taxes for a year — and now the IRS is going after my husband, since the store is under his name!
He didn’t acquire any profits, as it was his father’s store. My husband was in Texas at the time his father had this issue in Illinois. We are dealing with a $40,000 fee. Is there a way to get out of this situation?
This happened before we got married. Can the IRS come after my paychecks?
— Nida in Pennsylvania
Jacob Dayan answers…
This question is very difficult to answer with the information provided, but I’ll do my best to try and put your mind at ease.
First off, in the interest of being completely transparent, this is a very serious situation and should be handled with extreme urgency!
Hi, I’m Jacob Dayan, CEO, and co-founder of Community Tax and this is Taxing Questions. Here’s a specific situation that happens all too often: a parent sells or gives a business to a child, but that business hasn’t paid taxes in a long time. The child didn’t know about it, so they didn’t budget for it. Now the IRS comes calling with a five-figure tax bill. Is that child on the hook for the sins of the parent?
As for most things’ taxes, the answer is – maybe. In fact, unless a parent deceived their child, the answer is probably. What bad things can a parent do? Well, for starters, if the child’s information was used without their knowledge or consent, that’s identity theft.
I get into the details on Debt.com. But remember this, whether you start, buy, or were even handed the business spend some time considering the tax implications or you better be prepared to spend a lot of money later.
Now, that being said…
If he didn’t know his dad committed tax identity theft
If your husband’s information was used without his knowledge or consent, then you should consider that identity theft — and treat it like a crime. Here’s what your husband should do:
- File a police report locally.
- Contact the IRS and let them know this was caused by identity theft.
- Your husband will need to file an Identity Theft Affidavit with the IRS, explaining all the details he knows to be true regarding the situation.
- In the Identity Theft Affidavit, he should include the police report and any notices about the issue.
While it won’t be a short process, odds are you can resolve this situation eventually.
If he did know
What if your husband consented to the business being owned under his name and run by your father-in-law? Then, unfortunately, he can be held responsible for any tax responsibilities for the business.
Since Texas is a community property state, this also means that you can be collectible for any of your husband’s tax debts, even though you are not liable for them. If both you and your husband are collectible for the debt, then there are options available to protect your paycheck. But depending on what stage of collections the IRS is in, time may be of the essence.
What to do now
I highly recommend seeking representation by a licensed tax practitioner. This situation is not uncommon for our professionals, and we would be happy to have a preliminary discussion and investigate your situation. Either way, we wish you and your husband the best of luck in resolving this matter!
Jacob Dayan is co-founder of Community Tax LLC, a full-service tax company helping customers nationwide with tax resolution, tax preparation, bookkeeping, and accounting.
Watch for these 6 signs of tax-related identity theft
What if someone filed a phony tax return in your name and collected your tax refund? Don’t think it can’t happen to you. Tax identity theft happens frequently enough that there was an entire week – Tax Identity Theft Awareness Week – in February 2020 dedicated to the problem.
Tax identity thieves and scammers posing as IRS staffers love tax season, according to the Federal Trade Commission (FTC).  But you don’t have to become their next victim.
1. E-filing roadblocks
If the IRS rejects your e-filed return due to a duplicate filing under your Social Security number, you need to act immediately. Complete and send an Identity Theft Affidavit to the IRS, which uses the form to document identity theft. 
Once you report Social Security number identity theft to the IRS, you should file a paper return if you’re still unable to e-file. The IRS will send a letter acknowledging receipt of your identity theft affidavit. Then the IRS’s Identity Theft Victim Assistance organization will assess the issues and investigate whether your case affects other tax years. Also, inform your state income tax agency that your Social Security number may have been compromised. 
2. Baffling IRS letters
If the IRS sends you a notice about a suspicious tax return that you didn’t file, that’s a red flag that something could be amiss with your identity and personal information.  When you receive such a notice, follow the instructions to verify your identity with the IRS within 30 days. If you believe someone filed a fraudulent return, you can also request a copy from the IRS. 
When you call the Taxpayer Protection Program toll-free number provided in the notice, have the letter on hand and a copy of the previous year’s tax return, which you’ll need to verify your identity. Once the IRS verifies your identity, tell the agency whether you filed the return in question. If you didn’t file the return, the IRS will remove the fraudulent return from your IRS records.
3. Unwarranted collection notices
When the IRS sends a notice informing you that you owe additional tax or the agency is holding or offsetting your refund for a year you didn’t file a tax return, pay attention. 
Call the contact number provided on the letter right away to inform the IRS that you believe someone filed a fraudulent tax return using your private, personal information. Make sure you have a copy of your most recent tax return handy to help verify your identity.
4. IRS notice of accounts created or changed
If you receive notice from the IRS that a new account was created under your name, someone may have used your stolen Social Security number and/or other personal information for tax-related identity theft. Another red flag: The IRS sends a notice that your existing account was accessed or disabled when you didn’t log in or take any action. Contact the IRS Tax Fraud Hotline at 1-800-829-0433 to report suspicious activity.
5. IRS records indicate unfamiliar income
If the IRS sends a notice that you need to amend your tax return because IRS records show you received wages or other income not listed on your return, the missing information may be simply an oversight on your part.  Or, it could signal possible tax-related identity theft.
If you earned the income or wages in question, you need to amend your return. If you didn’t earn the income, don’t contact the IRS. Instead, you should contact the company or entity that reported the income and ask them to correct the error.
6. IRS imposters
Beware of scammers who call, falsely posing as IRS personnel. “They claim you owe taxes and demand that you pay right now, usually with a gift card or prepaid debit card,” warns the FTC. “They threaten you’ll be arrested or face other bad consequences if you don’t pay. But it’s all a lie. If you send the money, it’s gone.”
How to handle tax identity theft
Have you been a victim of tax-related identity theft?
You likely won’t know your identity has been stolen for tax-related purposes until you file your income tax returns. Some signs you have been a target are that you received income from another employer that you did not work for, that another tax return was already filed using your SSN, or that you owe additional taxes for a year you haven’t filed taxes. The IRS may also send you a letter stating it has received a suspicious return using your Social Security number.
How to report tax identity theft to the IRS
If you think you may have been a victim of tax fraud, the tricky part is that you still need to file a return. Hopefully, the IRS Taxpayer Protection Program will discover the fraud first and send you a notice in the mail. It is usually called Letter 4883C. You may have received a note like this, make sure to respond to the IRS promptly with the number provided in the letter so that you can verify your identity. If they don’t notice first and you find out when you try e-filing your return and are rejected, you will need to complete the IRS Identity Theft Form Affidavit, Form 14039, and submit a paper tax return instead. If you believe your business has been affected file Form 14039-B, Business Identity Theft Affidavit
For anyone who thinks they’ve been a victim of tax identity theft:
- File a complaint with the FTC as soon as you have discovered it.
- Contact one of the three major credit bureaus and place a fraud alert on your credit records: Experian Fraud Alert, TransUnion fraud alert, Equifax fraud alert (one will alert the other three).
- Contact your bank, credit card issuers or any other financial institutions that may have been compromised.
- If the thief opened any new accounts, make sure to contact those businesses to have those accounts closed.
Tips for avoiding tax identity theft
- If you have your tax forms mailed to you, make sure to keep an eye out at the end of the January/beginning of February for them. Make sure to check your email as well. If you haven’t received them by the end of February, call up your employers and the companies of any accounts where there may be tax implications (this includes 401k firms, banks for interest-bearing accounts, investment firms for stock accounts, financial advisers and more).
- Sign up for direct deposit whenever possible so you don’t run the risk of having your check scooped up in the mail before it even gets to you.
- Strengthen your passwords. Make sure you have strong passwords on your email and all other accounts linked to any tax-related materials. The IRS has new password guidance that allows you to use a passphrase instead of a password.
- Make sure your security questions are difficult and answers are somewhere safe. Keep a lookout to make sure your social media accounts aren’t linked to your preparation services anywhere — if scammers can figure out your tax information, they may be able to figure out your other online logins. This not only goes for social accounts but also bank accounts.
- Don’t ever use an unsecured Wi-Fi connection. Make sure you’re on a secure line, which you should always be on if you’re at home.
- Make sure to keep your Social Security cards and other information in a safe location in your home and online. This means, don’t leave it out just anywhere.
- Beware of phishing scams that try to get your Social Security number or bank information by prompting you to enter it on a website you don’t recognize.
- Finally, if you want to learn more about identity theft protection in general, check out How to Prevent Identity Theft.
Take advantage of IRS help
The IRS offers an identity protection PIN program, which gives you a unique number to sign your tax return with to avoid tax fraud. Any return filed without it is rejected. Residents of the following states are eligible for a PIN…
- District of Columbia
- Rhode Island
…You also may be able to take advantage of even more resources if you’re part of an IRS interest group. The Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs offer free tax assistance to those who qualify. If you make less than $54,000 a year, have a disability or disabilities, are limited in your English speaking, or are 60 years of age or older, you may qualify for free help from the IRS.
If you make up to $66,000 per year, you may qualify for e-File, which is a free way to pay your taxes online.
Be wary of messages that claim to be from the IRS
In 2017, “imposter scams” surpassed identity theft as the top complaint to the Federal Trade Commission for the first time – but it may be a classification issue more than anything else. “The rise in impostor scam reports is due to an increase in complaints about government imposters,” the FTC says. Scammers frequently pose as the IRS.
Bruemmer says you should never respond to emails, texts, or phone calls from “the IRS” – unless you’ve already heard directly from a verifiable IRS agent through another channel. “Don’t fall for anybody asking for your Social Security number,” he adds.
The IRS says it doesn’t initiate contact with taxpayers by email, text messages or social media channels to request personal or financial information, and phone calls can be verified by calling 1-800-366-4484.
What is the IRS Doing to Prevent Tax-Related Identity Theft?
After seeing a spike in identity theft regarding people’s income tax returns, the IRS teamed up with state tax agencies and those in the tax community to create a public-private sector partnership called the Security Summit. Formed in 2015, the group has set up systems to stop suspected fake tax returns before they are processed, which has led to a steep decline in people reporting tax-related identity theft.
Can a government shutdown affect my tax returns, or reporting my tax-related identity theft?
The short answer is: YES, absolutely. The IRS currently advises victims of tax fraud to visit the FTC site: identitytheft.gov. However, during a government shutdown, most employees are not working, and therefore are unable to help. Any sites like this one that requires government employees to monitor them are temporarily down. Had you gone to this page with the latest government shutdown, you would have been met with this message:
Due to the government shutdown, we are unable to offer this website service at this time. Information about identity theft can be found on the FTC’s website at: Identity Theft | Consumer Information
We will resume normal operations when the government is funded.
If there is a prolonged shutdown, it could definitely impact how long your refund might take. It also means that the IRS won’t be available to answer any questions you might have when filing.
How long will it take to receive my refund after tax fraud?
Once tax identity fraud has been established, the IRS Identity Theft Assistance Department will work with you to make sure your taxes are filed correctly and that anything suspicious is investigated and removed from your file. It can take up to 180 days for the process to be completed depending on how complex of a case it is. Occasionally it has taken more than a year.
What makes a case more complex? IRS investigators look at multiple variables to see how involved your case might be. Is the fraud just for this tax year or multiple years? Does it affect just your Social Security number or multiple individuals who may or may not be related? These all impact how long a case might be open.
If you are a victim of tax identity fraud, the one good thing to know is that the IRS is on your side. Hang in there and it’ll eventually get resolved and hopefully, you will be set up so that you will avoid anything like this in future filing years.
Tax Identity Theft: Important Notice
In 2017, the IRS received 242,000 reports from taxpayers reporting themselves as identity theft victims. Although the overall number fell by 40 percent from 2016, the loss to the American taxpayer is still in the hundreds of millions of dollars. The IRS advises taxpayers and tax professionals to remain vigilant to the various scams and schemes used by data thieves. The IRS has published a yearly list of their “Dirty Dozen” tax scams and what you can do to help protect yourself.
If you know you are or think you may be a victim you can contact Community Tax and they can assist you in requesting an IRS Investigation.
You can also visit www.freeirsreport.com – this service allows you to receive a confidential IRS tax report that will contain a complimentary analysis and review from a licensed tax practitioner of your tax return filings. It can flag any areas of concern which include potential identity theft.
Do you owe a lot to the IRS and fear you won’t get caught up? Get in touch to find the best solution.
Tax Identity Theft Statistics
The IRS has been closely monitoring tax-related identity theft since 2015. Here is some of its most recent data: