Editors' pick: Originally published Jan. 9.
When you're just gathering up your first receipts for tax season, tax fraud perpetrators are already preparing to file fake returns in your name.
Javelin Strategy & Research notes that identity fraud pried $15 billion from 13.1 million U.S. consumers in 2015, creating a identity fraud victim every two seconds. However, the Internal Revenue Service notes that it had to stop 19 million suspicious returns worth more than $63 billion in fraudulent refunds from 2011 through October 2014. In 2015 alone, it stopped 4.8 million returns totaling $10.9 billion.
In fiscal year 2015 alone, the IRS launched 776 identity theft related investigations, resulting in 774 convictions. The Treasury Inspector General for Tax Administration (TIGTA) who oversees the the IRS notes that the agency confirmed 1.4 million fraudulent tax returns involving identity theft in 2015, totaling $8 billion.
That's the good news. The bad news is that, even after creating a specific Identity Theft Victim Assistance organization within the IRS, tax-related identity theft cases can still take up to four months to resolve. Also, IRS-related scams are still prevalent, with phone callers requesting fake tax payments, targeting students and parents and demanding payment for a fake "Federal Student Tax," asking human resources departments for W-2 information and "verifying" tax information including Social Security and bank numbers. Some will even try to send a fake bill for 2015 related to the Affordable Care Act or will imitate software providers and call tax preparers into thinking they have an "update" for them, which always turns out to be malware that monitors their keystrokes and steals sensitive information.
As a result, the IRS has to remind people regularly that it will never call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. They'll also never initiate contact by email or text message (it's always by mail), threaten to bring in local police or other law-enforcement groups to have you arrested for not paying, demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe or ask for credit or debit card numbers over the phone.
"The collective efforts of the IRS, the states and the tax industry have provided new and important protections for taxpayers, which will continue to expand during the 2017 filing season," says IRS Commissioner John Koskinen. "These steps will be even more effective if taxpayers and tax professionals take action now to secure their data and computers before tax season begins. We all have an important role to play in protecting against identity theft and refund fraud."
More than 100 million returns will be filed in the upcoming months, which means tax filers should start beefing up security now. That can be as simple as locking down anything with your Social Security mumber on it.
"Anyone that sends data with their Social Security number without password protecting the data is at risk," says Debbie Oster, a certified public accountant and director with Margolin, Winer & Evens on Long Island. "Utilizing online banking or purchasing platforms can also open up individuals to risk - even if the process of entering sensitive information is as secure as possible, the possibility of a data breach after the fact always looms."
When Oster tries to file a client's return electronically, but has the return rejected on the grounds that it has already been filed using the client's Social Security number, she says that's usually the first sign that someone's filed a fraudulent return. Scott Eherenpreis, principal at Friedman LLP in New York, adds that people who receive an extension and file their taxes later are often vulnerable to fraud for just this reason, as are taxpayers who don't notice an offsetting refund on taxes they owe or who received feedback from the IRS regarding wages from an employer they've never worked for.
If any of the above happens to you when you file, ReKeithen Miller, a certified financial planner and portfolio manager with Scarsdale, N.Y.-based Palisades Hudson Financial Group in its Atlanta office, suggests notifying the IRS immediately. You're then going to have to file both a paper return -- because you still have to file your actual tax information -- and Form 14039, Identity Theft Affidavit to let the IRS know identity has been stolen. Even people whose data has been stolen through a data breach or some other means should file Form 14039 as a precaution. You can also contact the IRS at the Identity Protection Specialized Unit, toll-free at 1-800-908-4490 to start securing your account, and you can reach multiple state agencies at the numbers listed toward the bottom of this page.
"For taxpayers whose identities have been compromised, the IRS can issue them an identity protection PIN, which is a six-digit number assigned to eligible taxpayers that helps prevent the misuse of their Social Security number on fraudulent federal income tax returns," Miller says. "Once issued, this number must be included on every federal tax return a taxpayer files in the future to help the IRS confirm that the actual taxpayer is filing the return."
You'll get a PIN by mail after filing Form 14039 and get new PIN each year to use on upcoming tax filings. Without the proper PIN, the IRS will not process the tax return. However, before you have your identity stolen and have to report it to banks and credit agencies anyway, you always have the option of accessing a free copy of your credit report from Equifax, TransUnion and Experian each year through annualcreditreport.com or by phone at 877-322-8228. You can also opt out of unsolicited credit card or insurance offers by going to www.optoutprescreen.com, or 888-5OPT-OUT, which will remove your name, address and personal information from lists supplied by the credit bureaus.
Meanwhile, if you discover your identity's been stolen and you live in any state but Michigan, you can have put a freeze on your credit until you get the situation sorted out. Granted you may want to hold off on that option if you need access to credit for a loan or a purchase in the near future, but it's an easy way of securing your digital data and locking thieves out.
"On top of digital identity theft, tried and true, 'old school' methods are still prevalent as well," Oster says. "For example, are you shredding all sensitive documents before you discard them?"
There are even simpler safeguards, including not carrying your Social Security card or paperwork with your Social Security number on it. If you receive Social Security payments, check your Social Security earnings statement for any fraudulent activity. Also, if you receive calls from people claiming to be the IRS, don't offer any personal information and tell them to send any request by mail. The IRS will typically only contact you initially by mail and, later, by registered mail. If you receive any such calls, notify the inspector general's office at 1-800-366-4484. Lastly, just remember that it can take four months at a minimum to straighten things out. If you don't have the free hours to do so yourself or just aren't used to dealing with the government, it may be best to delegate that responsibility as much as the IRS allows.
"Dealing with tax fraud takes a lot of patience, so be prepared to spend a lot of time corresponding with the IRS," Miller says. "You also have the option of engaging your tax preparer to communicate with the IRS on your behalf, if they are qualified to do so."