Identity Theft – There is More At Risk Than Your Credit Cards

August 2013

With the ever-growing presence of speedy electronic transactions in our lives, it comes as no surprise that identity theft is one of the fastest growing crimes in the United States. A growing subset of identity theft cases beginning to raise concerns is the use of stolen identities to commit various forms of tax fraud. Many clever (and not-so clever) thieves have devised a plethora of schemes aimed at defrauding taxpayers and the IRS.

In a November 2012 meeting of the Committee on Oversight & Government Reform, the Treasury Inspector General for Tax Administration (TIGTA) released some unsettling numbers related to identity theft and tax fraud. The number of reported incidents of identity theft related tax fraud from 2008 to 2011 increased from 51,700 to 1.1 million,. It also was estimated that another 1.5 million incidences went undetected in 2011 alone.

TIGTA also provided estimates that a staggering $21 billion could be fraudulently refunded over the next five years. With the average fraudulent refund being $3,400, the main issue at hand is that the IRS does not have the resources to combat this pervasive problem alone. There are some steps taxpayers can take to help safeguard their identities and tax returns.

Common Schemes
The most common and simplest from of identity theft related tax fraud is the use of another person’s Social Security Number, combined with other information, to file a false tax return for a refund. In this case, the thief beats the taxpayer to the punch by filing for and receiving a taxpayer’s refund. If the fraudulent return is filed first and the IRS doesn’t identify it as a fraud, it is accepted as the original return and the refund will be sent unknowingly to the thief. When the taxpayer later files a legitimate return, the IRS will reject it because their records will indicate the taxpayer already has filed. If the taxpayer’s true return has been rejected, the only recourse is to follow the Service’s steps for reporting identity theft, and at best, a fraud of this type would take at least six months to resolve.

Another form of identity theft tax fraud is the opposite of filing a fraudulent return. In some instances there have been thieves who obtained jobs using stolen identities.  In this case the thief would work in a job using a stolen identity and would have no federal withholding taken out of paychecks. The criminal would not file a tax return, and would pocket the tax-free wages. The victim would not be aware of this scheme until filing a tax return that of course omits those wages.  The IRS will send a notice to the victim stating that the taxpayer omitted wages on Form 1040 and will demand more taxes be paid. Similar to the first scheme, the taxpayer’s only recourse after receiving the notice would be to report the identity theft and play the waiting game.

Whatever the scheme to perform tax fraud, the criminal needs one important item: The victim’s personal information. Below is a link citing some of the most common ways identity thieves get personal information and another summarizing recent cases. We encourage you to read through some of these examples to learn what to be wary of before providing your personal/financial information.

Link to the most common ways identity thieves get personal information

Preventing & Countering Identity Theft and Fraudulent Returns

Below are a few ways to avoid putting your information at risk from identity theft:

Only give your Social Security Number when it is required.  This may seem fairly obvious, but many online consumers are prone to giving more information than necessary when creating accounts or submitting applications online.

If the site or person requesting your information seems questionable, do some research.  Sometimes a Google search will suffice, but you could also check to see if it is a legitimate and reputable business by using the Better Business Bureau’s website.

If entering personal information online, make sure the website is secure. This is a feature provided by many banks or other sites that require accounts. Look for a website URL that begins with “https” and a little icon of a padlock at the bottom of or in the URL line of your browser.

Avoid emailing unsecure documents that may contain Social Security Numbers.  The best way to avoid this is to send password protected files or use a secure online drop box or email encryption software.

Remember: The IRS NEVER requests information via email, text, telephone or social media.  Many victims have been duped by fraudsters impersonating IRS personnel and making false information requests. The IRS also provides steps to avoid and report phishing attempts on their website.

Use a credit monitoring service.  Although this may cost some money, it can be a valuable tool to alert you to changes in your credit, especially if a thief has used your identity to open new lines of credit.

Timely file your tax returns. If you have all the pertinent information to file your tax return, why wait? The longer you wait to file your return, the more opportunity a thief has if your personal information has been compromised.

Lastly, if at any point you believe your identity has been stolen you should fill out IRS Form 14039, Identity Theft Affidavit, and submit it to the IRS. The IRS may then provide you with an IP PIN, which is a number to use in place of your Social Security Number when filing your tax return. After receiving your IP PIN, any return filed without it automatically will be rejected.

In our fast-paced digital world, the growing threat of identity theft looms heavily over us all. As consumers and Internet users it is in our own best interests to be vigilant when giving out our personal information. By being a little more cautious and educated regarding the problem of identity theft, we may save ourselves from future stress, aggravation, and financial peril.

For more information about the topics covered in this article, please contact your BNN advisor at 1.800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter.  Please contact us if you wish to have formal written advice on this matter.