Tax-related identity theft is a persistent problem in the US. In fact, the IRS's Criminal Investigation Division reported that it identified$2.3 billion in tax fraud in fiscal year 2020, with the fraud ranging from cyber crimes to tax-related identity theft.
Have you fallen victim to tax identity theft and need help dealing with the financial ramifications? Or do you just want to learn ways to prevent it from happening to you? Either way, this guide can help.
Tax identity theft occurs when someone files a tax return using your Social Security Number (SSN). In some cases, thieves do this in order to claim a fraudulent tax refund. In others, they may have used your SSN to obtain employment. When this occurs, their employer will report all income to the IRS using that SSN. When you don't report that same income on your own return, the IRS will flag it as suspicious and require you to pay taxes on that additional income. It may even lead to a tax audit.
Victims of tax identity theft face serious financial ramifications. Not only are they unable to file their own returns (or claim their tax refund), but other financial vulnerabilities might be at work. Unauthorized loans, credit cards, and other accounts may have been opened using the victim's identity.
Victims are typically encouraged to freeze their credit when tax-related identity theft occurs. They may also need to work with creditors and credit reporting agencies to clear their name of any fraudulent activity.
Generally, tax identity theft -- and all identity theft, for that matter -- occurs after a person's sensitive information has become public or fallen into the wrong hands. This often happens due to security breaches or digital data hacks.
Tax identity theft often occurs in February and early March, as thieves must file the fraudulent returns before the real taxpayers file their legitimate ones. Fortunately, the IRS has taken steps to reduce identity theft from many angles. The agency has hired more employees dedicated to stopping fraud, implemented additional safeguards, and changed many of the standards used to file and authorize returns.
Despite these efforts, tax identity fraud does still occur. It's important everyday Americans are prepared should it happen.
If you've fallen victim to tax identity theft, there are several ways you might learn of it. First, your legitimate tax return may be rejected. When you go to e-file your tax return, the IRS will reject it if a return has already been filed for your SSN. If you filed a paper return, you will get a rejection notice in the mail, alerting you that your return has already been filed.
In the event the thief used your SSN to obtain a job, you likely won't learn of the issue until your returns have been filed and processed. Once the IRS sees that your reported income does not match the income reported by employers to your SSN, they will send you a letter saying you failed to report income or that you owe additional taxes.
It's important to note that all communications from the IRS will come via mail.The IRS will not call, text, or email you regarding your returns or any suspicious activity. Do not provide sensitive information to anyone pretending to be an IRS agent via these methods,and report the issue to the U.S. Treasury Inspector General for Tax Administration.
If you discover that you are the victim of tax identity theft, you'll need to report it to both the IRS and the Federal Trade Commission.
Specifically, you'll need to:
If you tried to e-file and got rejected, you should go ahead and file your paper return and pay any taxes you owe via mail. If at any point you need help in the process, call the IRS Identity Protection Specialized Unit at 1-800-908-4490 for assistance. An agent can walk you through the appropriate steps to both report and respond to the theft.
The IRS says it typically takes 120 days or less to address cases of identity theft, but due to "extenuating circumstances" caused by the COVID-19 pandemic, the IRS's identity theft inventories have increased dramatically. It's taking them 260 days on average to resolve identity theft cases.
This doesn't even include the time and resources needed to address other consequences of identity theft, such as unauthorized loans, credit cards, and purchases. Depending on how deep the theft goes and how available your personal information was, the financial ramifications can often last months or even years.
The important thing to do is to remain vigilant. This means:
In some cases, you may want to involve a lawyer -- especially if your investments, retirement accounts, mortgage, or other major financial products have been affected. They can help you traverse the legal issues that crop up with creditors, lenders, and financial institutions along the way.
Many victims of tax identity theft experience cash flow issues or must deal with additional debt as a result of the experience. They also may be unable to take out traditional loans or credit accounts due to the impact the theft has had on their credit score and profile.
When this occurs, victims have five options:
There's always the option to wait it out, too. If the damage was minimal or you weren't relying on your refund for financial stability, you may be able to await the IRS' resolution of your case.
If you aren't already the victim of tax-related identity theft, you should take action to ensure you never become one. This means protecting your personal information, shredding sensitive documents, and using strong passwords on all online accounts.
You can also:
You should also file your returns as early as possible. A fraud cannot file a return using your Social Security Number if one has already been filed. Make it a point to file your taxes as soon as you have the information necessary to do so.
[This article was originally published on the Simple Dollar in February, 2019. It was updated in December, 2021.]