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Tax Fraud – Signs You May be a Victim of a Fradulent Tax Return

by Kevin Mercadante

Identity theft is a big enough disaster all by itself, but when it brings us into closer contact with the Internal Revenue Service, that adds a whole other dimension to the picture. Yet if you are a victim of identity theft, there is a growing chance that it will have its origins in tax fraud.

Tax Fraud is Growing Rapidly

Tax Fraud - signs you may be a victim

These signs may indicate you have been a victim of tax fraud

According to the Federal Trade Commission (FTC), tax or wage related fraud accounted for more than 43% of all identity theft cases in 2012, up from 24% in 2011, and 15% in 2010. Clearly identity thieves are finding fertile ground in income tax returns.

Basically, the identity thief gains access to your name, address, and Social Security number, and then files an income tax return in your name, but directing the refund into his own bank account. For this reason, the refunds can be abnormally large. This is all accomplished very early during the tax filing season, to let the thief be sure to file the return and obtain the refund well before you’re able to file on your own.

Sometimes tax fraud isn’t even done for the purposes of obtaining a refund. The thief may be trying to create a legitimate looking profile that will enable him to gain employment. The filing of the bogus tax return can include W-2s and 1099s that are either fictitious, or even completely legitimate, meaning he actually worked at those companies under your name and Social Security number.

How to Know if You Are a Victim of Tax Fraud

The first time you find out that you are a victim of tax fraud usually occurs when you try to file your return electronically. Because another return has already been filed under your name and Social Security number, the IRS will deny your attempt to file electronically.

If you are able to file your tax return, you may discover the theft through a letter from the IRS. The letter could indicate any one of the following:

  • That multiple income tax returns were filed for the same year,
  • W-2s or 1099s were filed for the tax year in question that didn’t appear on a specific tax return, or
  • that there is a discrepancy in the amount of tax that you owe on one or both tax returns.

Still another possibility – at least in the case of an identity thief looking to establish an employment profile – is that you may receive one or more W2s or 1099s from an employer you never worked for.

What to Do if You’re a Victim of Tax Fraud

The first order of business will be to file a police report. Tax fraud is a crime and needs to be reported as such. By filing the report you’ll be creating an official record of the crime, as well as effectively “date stamping” the event. You can then take the police report and use in your next steps.

Immediately after filing a police report you need to get in touch with the IRS. Go to the Identity Protection Specialized Unit at the IRS website and follow the steps. One of the most important steps will be to file IRS Form 14039, IRS Identity Theft Affidavit. You can file that with the IRS, along with a copy of the police report.

The good news is that the IRS will not hold you responsible for the illegally obtained refund. You will receive the proper refund, since the tax fraud was a crime committed by another party. It will however take considerably longer for you to receive the correct refund as the IRS will need time to react to the fraudulent refund.

As soon as you file the initial paperwork with the IRS, the next step will be to contact all three of the credit repositories – Equifax, Experian, and Trans Union. Report to each repository that your identity has been stolen, and that you would like a statement included on your credit reports that will indicate that no credit can be obtained under your name and Social Security number unless the creditor contacts you directly. You may consider freezing your credit profile.

If you’re lucky, the thief was interested only in obtaining a refund in your name. But since he already has your Social Security number and other important information, he can still use it either to obtain credit, or to sell it to another thief who will use it in much the same way.

Going forward

Sadly, if you have been the victim of tax fraud once, it can happen again. It’s very important then that you do whatever you can to keep your information from falling into the wrong hands.

Do your returns yourself or have a CPA do it for you. It’s possible that your tax information could be compromised by a fly-by-night tax-preparation service. Identity theft is often an inside job, undertaken by employees who are trusted to protect your information. If this is a concern, either prepare your tax returns yourself, or hire a reputable CPA do it for you.

Be careful who you give your social security number and tax returns to. Unfortunately, it often seems as if the whole world wants either our Social Security number or our income tax return for one purpose or another. Resist that to the greatest degree possible. Your Social Security number should only be given to your bank, your employer, and the Department of Motor Vehicles. There are few entities beyond these three that seriously need it. And never – ever – provide your Social Security number or other sensitive information in response to a phone call or an email. Anyone who needs this information already has it and shouldn’t be asking for it. (Here is an example of an IRS phishing scam).

Keep your tax information under lock and key. Your own home or office could have been the place where the identity thief got your information. Your income tax returns, and any documents that include your Social Security number or other sensitive information, should be kept to a minimum, and under lock and key. Never store important documents in a place where anyone can get them.

Have you ever been the victim of identity theft by tax fraud?


Published or updated March 7, 2013.
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