Everyone knows that not paying your taxes can get you into trouble with Uncle Same. But it turns out, the same is true if you do pay your taxes.
In the past three years, tax identity fraud has skyrocketed. According to attorney Steve Poporoff of the Federal Trade Commission, complaints about this relatively new crime have tripled since 2010. In fact, last year they made up almost half (44%) of the total number of consumer complaints the commission received.
Tax identity theft occurs when someone steals your personal information and either applies for a job using your Social Security number or files a phony tax return in your name in order to claim a refund. The refund is then sent to the fraudster, leaving you fruitlessly checking your mailbox for a check.
Poporoff describes tax I.D. fraud as “an issue that looms large… It impacts millions of people each year and costs the government billions” of dollars in tax refunds that should have never been paid.
For those affected, it’s a nightmare.
Once the IRS sends a refund to the crook, your legitimate refund request will be denied. After all, according to the agency’s computers, a refund was already issued to you.
Correcting the problem is often a frustrating and drawn-out process. You have to file a form explaining to the IRS that you are the victim of ID theft and provide proof that the individual that Social Security number does indeed belong to you. The IRS must then review your complaint, which means it could take months for you to get your refund.
Becoming a tax fraud victim could also result in getting a letter from the IRS charging you with a tax deficiency for not reporting all of the income you earned last year because your return did not include the second job you have at XYZ Appliance store.
Now you have to prove that someone else got that job by using your Social Security number and took home the income associated with it.
Here’s the bad news: the fraud could get worse.
There’s a good chance the thief who has what’s called your “Personal Identifying Information” (PII) will use it to hack into your bank account, open credit cards and make your life miserable. There are cases where crooks have continued to file bogus tax returns with the same Social Security numbers they used in the past.
Once you have been hit with tax identity fraud, the IRS will issue you a PIN that you have to include when you file your return. This tells the agency that you are the taxpayer assigned to that Social Security number.
“This is happening far more than we are being told,” asserts Al Pascual, senior analyst at Javelin Strategy & Research, a firm that provides research and solutions to financial institutions on minimizing the risks involved with transactions.
Shockingly, according to Pascual, there are instances where “prisoners are filing tax returns using [stolen] information and having the money sent to someone on the outside. They even know that if they keep the amount under $9,000 this avoids the IRS red flag.”
He also claims that “there are classes that- believe it or not- are held in the basement of churches that teach you how to use TurboTax or H&R Block to file fraudulent tax returns.” Filing electronically enables an scammer to process a large number of returns in a short period of time.
To help protect against this fraud, request that the tax refund be put on a debit card. That means you avoid the awkward possibility of getting caught when trying to cash a check.
“The reason this works,” says Pascual, “is that Congress changed the mandate of the IRS. It used to be an ‘enforcement’ agency. Now the focus is on customer service.” Under this change he says speeding up the time it takes to issue a refund is a top priority at the agency, which can make it hard to spot potentially fraudulent returns.
There are a number of things you should do to reduce the possibility of being a tax ID victim:
- Closely guard your personal information, especially your Social Security number. Do not keep your Social Security card in your wallet, keep it in a secure location.
- Shred all documents containing personal information, including account numbers, dates of birth, etc.
- Know your tax preparer. “Just walking into an office off the street is not a good idea,” says Poporoff, who adds that “some tax preparation services are not trustworthy.” Be sure to check a professional has the proper safeguards to ensure that your information is secure and ask for past client referrals. “They may just set out a shingle solely for the purpose of collecting information,” he warns. A better approach is to ask people you know for a reference.
- Take the time to add a security code so that only you can access your computer, laptop, phone and other electronic devices. If you file your tax return by computer, make sure your device has encryption software. And never send any type of personal information over public Wi-Fi, such as the kind in a café or hotel lobby. These public hot spots are favorite handouts for ID thieves.
- If you are sending your return through the U.S. postal service, the FTC recommends dropping it off yourself inside the local post office. “One of the worst [strategies] is to put your tax return in your own mailbox with the flag up to signal that you have outgoing mail,” says Poporoff.
To educate the public against tax identity theft, the FTC is hosting townhall meetings, webinars and a Twitter exchange this week on the topic. Events and written materials are available in both English and Spanish. Details are available here