The IRS, taxpayers, and tax preparers share a common enemy: identity thieves. We all have a part to play in the fight against tax-related identity theft. Your role starts by learning the mechanics and warning signs. From there, taxpayers can take proactive steps to protect their data online and at home.
Understand How Tax Fraud Happens
Dishonest individuals may steal taxpayers’ personal and financial information from sources outside the IRS, such as social media accounts where people tend to share too many details or phishing scams that appear to come from official sources. Once they obtain an unsuspecting taxpayer’s data, thieves may use it to file fraudulent federal and state income tax returns, claiming significant refunds.
Paperless e-filing facilitates these scams: Thieves submit returns electronically, based on falsified earnings, and receive refunds via mail or direct deposit. Sure, the IRS maintains records of wages and other types of taxable income reported by employers, but they don’t usually match these records to the information submitted electronically before issuing refund checks. By the time the IRS notifies a victim that it’s received another tax return in his or her name, the thief is long gone and has already cashed the refund check.
In addition to refund fraud, thieves may use stolen personal information to access existing bank accounts and withdraw funds — or open new ones without the taxpayer’s knowledge. Criminals are becoming increasingly sophisticated and their ploys more complex, making identity theft harder to detect.
Recognize the Warning Signs
Taxpayers are the first line of defense against these scams. The IRS lists the following warning signs of tax-related identity theft:
Your electronic tax return is rejected.
When the IRS rejects your tax return, it could mean that someone else has filed a fraudulent return using your Social Security number. Before jumping to conclusions, check that the information entered on the tax return is correct. Were any numbers transposed? Did your college-age dependent claim a personal exemption on his or her tax return?
You’re asked to verify information on your tax return.
The IRS holds suspicious tax returns and then sends letters to those taxpayers, asking them to verify certain information. This is especially likely to happen if you claim the Earned Income tax credit or the Additional Child tax credit, both of which have been targeted in refund frauds in previous tax years. If you didn’t file the tax return in question, it could mean that someone else has filed a fraudulent return using your Social Security number.
You receive tax forms from an unknown employer.
Watch out if you receive income information, such as a W-2 or 1099 form, from a company that you didn’t do work for in 2017. Someone else may be using the phony forms to claim a fraudulent refund.
You receive a tax refund or transcript that you didn’t ask for.
Identity thieves may test the validity of stolen personal information by sending paper refunds to your address, direct depositing refunds to your bank or requesting a transcript from the IRS. If these tests work, they may file a fraudulent return with your stolen data in the future.
You receive a mysterious prepaid debit card.
Identity thieves sometimes use your name and address to create an account for a re-loadable prepaid debit card that they later use to collect a fraudulent electronic refund.
If you suspect foul play, contact your tax preparer immediately. He or she can help determine whether you’re a victim of tax-related identity theft and identify steps to remedy the situation.
Take Preventive Measures
You may wonder how many taxpayers file electronic vs. paper returns. “There are 150 million households that file federal and state tax returns involving trillions of dollars…. More than 90% of these tax returns are prepared on a laptop, desktop or even a smartphone — whether they’re done by an individual or a tax preparer. This is a massive amount of sensitive data that identity thieves would love to get access to.… With 150 million households, someone right now is clicking on an email link they shouldn’t, or skipping an important computer security update, leaving them vulnerable to hackers,” said IRS Commissioner John Koskinen in a recent statement about the Security Summit Group. (See “IRS Creates Security Summit Group” below.)
How can you actively safeguard your personal data online and at home? Here are four simple ways to thwart tax-related identity theft:
- Keep your computer secure. Simple, cost-effective security measures add up. For example, use updated security software that offers firewalls, virus and malware protection and file encryption. Be stingy with personal information, giving it out only over encrypted websites with “https” in the web address. Also back up computer files regularly and use strong passwords (with a combination of capital and lowercase letters, numbers, and symbols), or use a password manager, like LastPass.
- Avoid phishing and malware scams. Be leery of emails you receive from unknown sources. Never open attachments unless you trust the sender and know what’s being sent. Don’t install software from unfamiliar websites or disable pop-up blockers.
- Protect personal information. Treat personal information like cash. Don’t carry around your Social Security card in your wallet or purse. Be careful what you share on social media — identity thieves can exploit information about a new car or home purchases, past addresses, vacations, and even your children and grandchildren. Keep old tax returns in a safe location and shred them before trashing.
- Watch out for scammers who impersonate IRS agents. IRS impersonators typically demand payment and threaten to arrest victims who fail to ante up. The Federal Trade Commission recently issued an alert about police raids on illegal telemarketing operations in India that led to the indictment of dozens of IRS impersonators. Remember: The IRS will never call to demand immediate payment, nor will they call about taxes you owe without first mailing you a bill.
Another simple way to prevent someone from filing a fraudulent return is simply to file your return as soon as possible. The IRS began processing tax returns in January. If you file a tax return before would-be fraudsters do, their refund claims are more likely to be rejected for filing under a duplicate Social Security number.
Join the Fight
The deadline for filing your 2017 return is fast approaching. The IRS expects more than 70% of taxpayers to receive a refund for 2017, and it’s on high alert for refund fraud and other tax-related identity theft schemes. You can help the IRS in its efforts to fight tax fraud by watching for these warning signs and safeguarding your personal and financial information.
IRS Creates Security Summit Group
In 2015, the IRS formed the Security Summit Group, a collaboration of federal and state tax agencies and tax practitioners to find new ways to protect taxpayers and safeguard the tax system. Security Summit Group efforts led to a 50% reduction in the number of new reports of stolen identities on federal tax returns in 2016 compared to 2015, and a 40% reduction in the number of new reports in 2017 compared to 2016.
One example of a recent scam the Security Summit Group is fighting to reduce is phishing scams targeted at business owners. A phishing scan occurs when an unknown entity requests personal information from a business or individual, pretending to be a trusted source. in the past two years, there has been an increase in phishing schemes targeted at business payroll departments, seeking employees’ personal information. The IRS warns business owners to watch out for such scams and report them and warns employees to notify their employers of the threat. Learn more here.