You submit your records and receipts to your tax accountant who prepares and submits your tax return. Then, instead of sitting back to receive your anticipated refund, your accountant informs you that you have been rejected! Someone else has already filed a return for this tax year under your Social Security number. You are now a victim of tax identity theft.

What is tax identity theft?

Thieves knew to act quickly to request a refund because they needed to submit the return before the actual taxpayer’s filing occurred. They did not need to wait for information from legitimate income sources, and the IRS did not have information in the system to check the validity of information on the return. The returns could be processed as reported and refunds issued. This means that when a taxpayer’s legitimate tax return was submitted, it would not be accepted by the IRS, and all actions would be halted until the now identified fraud was investigated.

How do they get my information?

Tax identity theft is a large-scale problem in the United States due to an increase in cyber attacks on employers, insurers, payroll service providers, universities, and retailers. The Equifax security breach alone exposed 143 million consumers – with complete data on Social Security numbers, names, addresses, birth dates, and, in some cases, driver’s license numbers. The information needed for tax refund identity theft is also obtained through phishing. Phishing is a scam where criminals attempt to steal your financial information through an email or a fake website. In many cases, the emails ask for specific personal information or try to get you to click on a link to install spyware or other malware on your computer.

According to the Better Business Bureau, callers posing as agents from the IRS attempting to collect bogus tax debts topped the list of the most reported scams of 2016. In this scheme, callers posing as IRS agents tell the victims they owe money and then threaten arrest if the amount is not paid immediately. The callers also use fake names and IRS badge numbers and imitate the IRS toll-free number on caller ID so it looks like the IRS is calling. The IRS reminds taxpayers of the following things that scammers will do that the IRS will never do:

  • Call to demand immediate payment
  • Call about taxes owed without first having mailed you a bill
  • Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe
  • Require you to use a specific payment method for your taxes, such as a prepaid debit card
  • Ask for credit or debit card numbers over the phone
  • Threaten to bring local police or other law-enforcement groups to have you arrested for not paying

What steps is the IRS taking to fight tax identity theft?

In 2015, the IRS joined with state tax agencies, and the tax community, including software developers, payroll product processors, financial institutions, to create the Security Summit. The membership includes 42 state agencies and 20 industry offices in addition to the IRS.

As a result, between 2015 – 2019:

  • Number of taxpayers reporting they were identity theft victims fell 80%
  • Number of confirmed identity theft returns stopped by the IRS declined by 68%
  • IRS protected a combined $26 billion in fraudulent refunds by stopping confirmed identity theft returns
  • Summit financial industry partners recovered an additional $1.7 billion in fraudulent refunds

In 2017, the IRS also collaborated with this group to establish the Information Sharing and Analysis Center (ISAC). This public/private partnership facilitates  information sharing consistent with applicable law, and analytics necessary to detect, prevent, and deter activities related to stolen identity refund fraud. This platform is near real-time sharing of identity tax refund fraud alerts and analysis of suspicious activity, while the Security Summit focus is on the strategy, program development and monitoring.

The chart below as reported by The Treasury Inspector General for Tax Administration shows the number of fraudulent tax returns identified by the IRS, as well as the refund amounts that were claimed and stopped for Processing Years 2019, 2020 and 2021, as of February 27, 2021.

Filing Season Fraudulent Refund Returns Identified Fraudulent Refund Returns Stopped Amount of Fraudulent Refunds Identified Amount of Fraudulent Refunds Stopped
2019 3,529 2,895 $15,771,452 $12,166,421
2020 30,038 29,634 $135,569,131 $133,522,995
2021
(Preliminary)
2,325 1,153 $15,960,050 $12,635,306

Other IRS initiatives include:

  • The IRS automatically issues an Identity Protection Personal Identification Number (IP PIN) to
    confirmed identity theft victims if the case is resolved prior to the start of the next filing season.
    Taxpayers nationwide can request an IP PIN directly from the IRS if they are concerned that their personal information has been stolen and want to protect their identity when filing a Federal tax return.
  • Due to the COVID-19 pandemic, unemployment insurance identity theft substantially increased. The IRS has cautioned taxpayers to be on the lookout for identity theft involving unemployment benefits whereby a fraudster files fraudulent claims for unemployment compensation using stolen
    personal information of individuals who had not filed claims. Payments made as a result of
    these fraudulent claims went to the identity thieves.
  • The IRS made the Return Review Program (RRP) its primary individual tax refund fraud selection system. Another system, the Dependent Database, is also used in the detection of identity theft. This system combines data from the IRS, the Department of Health, the Social Security Administration, and other sources.

What can you do to protect yourself?

Tax identity theft is unpreventable, but there are things that you can do to reduce your risk.

  • If you do not file electronically, send the return through certified mail.
  • When filing electronically, use a secure computer on a secure network.
  • Use professionals who can be trusted with your personal information.
  • File your return as early as possible. A thief can’t file a return in your name if you’ve already filed a legitimate one.
  • Be alert to possible scams. The IRS does not email or text taxpayers, and your first contact with the IRS will always be through the traditional mail.
  • If you receive an unsolicited email that appears to be from the IRS, you can report it by forwarding it to phishing@irs.gov.
  • Be alert to possible tax identity theft if you are contacted by the IRS or your tax professional about the following:
    • More than one tax return was filed using your SSN
    • You owe additional tax or have had collection actions taken against you for a year you did not file a tax return
    • IRS records indicate you received wages or other income from an employer for whom you did not work

What should you do if you fall victim?

  • Notify the Federal Trade Commission (FTC), Social Security Administration (SSA), and IRS. You should call the IRS Identity Protection Specialized Unit at 800.908.4490 to report the theft.
  • Complete and submit IRS Form 14039, the Identity Theft Affidavit. This ensures the IRS knows that future returns may be at risk.
  • Apply for an Identity Protection PIN (IP PIN). Victims of identity theft can apply for a six-digit IP PIN, which the IRS uses to confirm your identity on future electronically filed tax returns.
  • Contact one of the three major credit bureaus to place a fraud alert on your credit records: Equifax, Experian or TransUnion. A fraud alert on your credit report will require potential creditors or lenders to contact you directly and obtain permission before opening a new line of credit.
  • Consider purchasing credit monitoring to keep tabs on your credit report. Credit monitoring services will not only alert you when someone applies for a new line of credit in your name, but also will monitor existing accounts and notify you of any changes. Many also offer recovery assistance services, monetary and legal assistance, and insurance that covers expert identity theft consulting, as well as financial relief.

Identity theft is a problem in many areas, including tax. The IRS has taken many steps to improve its fraud detection and prevention capabilities. You, as a taxpayer, may not be able to eliminate fraud, but with increased awareness and actions that complement IRS security, you may be able to avoid being the next victim of tax identity theft.

LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.