Identity Theft-Related Tax Fraud

Identity theft is among one of the major issues the IRS is currently facing. Identity theft-related tax fraud occurs when a fraudster uses stolen information to file a fraudulent tax return in the victim’s name. Tax-related identity theft incidents have grown significantly over the past few years mainly as a result of e-filing and direct deposit, both of which do not require confirming the taxpayer’s identity to file.

The most common tax-related identity theft situation is where a fraudster files an income tax return primarily to receive a refund before the actual individual files the proper return. Taxpayers usually become aware that they are the victim of tax-related identity theft after receiving a notice or letter from the IRS stating one of the following:

• More than one tax return has been filed using the same SSN
• Taxpayer may have a balance due, refund offset or have had collection actions taken against them for a year they did not file an income tax return
• IRS records indicate taxpayer received wages from an employer unknown to them

In the last few years, the number of incidents of identity theft-related tax fraud has drastically increased from about 51,700 cases in 2008 to over 1.1 million cases in 2011. This number represents only the known cases of identity theft.

The taxpayer should notify the IRS immediately at 1-800-908-4490, if the taxpayer believes that his (her) tax account has been affected by identity theft. The Form 14039, Identity Theft Affidavit, must be filled out and sent to the address indicated on the forms instructions. Also, if a taxpayer’s return could not be processed electronically, the identity theft affidavit should be attached to the paper return and sent to the IRS location for the taxpayer’s state.

Some identity theft victims have incorrectly filed the Form 3949-A Information Referral, to report identity theft. Taxpayers are advised by the IRS not to use this form to report identity theft, since it is for notifying the IRS about a suspected individual or business that is not complying with tax laws

The IRS has launched several pilot programs to combat fraud. One is a Personal Identification Number or PIN, which is given to victims of identity theft. This PIN is used by the victims to identify their returns and add an extra level of security to the legitimate return. The IRS also just finished its first pilot of a program designed to share sensitive taxpayer information with local law enforcement officials in order to better investigate fraud. The IRS tested this pilot in Florida, and in October IRS expanded the pilot program to eight additional states including Pennsylvania and New York.

Although there is a possibility of becoming a victim, additional measures can be taken to reduce the chances of becoming an identity theft victim. Individuals are advised to take the following precautions:

• Never carry social security card or other documents with their SSN
• Never give a business their SSN just because they ask
• Never give personal information over the phone, through the mail, or internet unless you initiate the contact or are sure of whom you are dealing with
• Shred documents with account numbers, PINs, or other important information
• Check their credit report every 12 months