The content has been provided by a third party not affiliated with E*TRADE. The material is for educational purposes only.
Attacks on Internal Revenue Service digital systems, designed to steal data that can be used to file fraudulent tax returns, are the end game. It starts with a breach of a secure credit card, bank or other system that provides criminals with information they can then use to try to obtain your IRS electronic filing PIN. All this in order to claim your refund before you do.
Sadly, you are unlikely to know any of this has happened until you try to file your return or, if you are lucky, receive a letter from the IRS saying that a suspicious return has been filed in your name.
According to the Government Accountability Office, the IRS estimated that it prevented $24.2 billion in identity-theft refunds in 2013. That’s the good news. Unfortunately, the agency also lost $5.8 billion to this type of fraud the same year. Reports of the theft of personal and tax-return information from tax software providers such as TaxSlayer LLC and TaxAct have also been in the news recently.
Signs of Trouble
One worst-case scenario occurs when a federal or state computer blocks you from filing your return because someone else has already filed in your name. A better outcome is when you are contacted by the IRS saying it has blocked your return or by your tax preparer asking if the return he or she has is actually from you. Either of these scenarios, especially if you have not yet filed your return, tells you something is likely terribly wrong.
In years past people have received debit cards loaded with their tax refunds – even though they had not yet filed. This could happen because a criminal (or estranged spouse) filed fraudulently but was unable to prevent the refund from being mailed to you.
- Some additional warning signs, if you are contacted by the IRS or your tax preparer, include:
- Being told that more than one tax return was filed under your Social Security number
- Notification that you owe additional tax or there are collection actions being taken for a tax year in which you have not yet filed
- Indication that you received wages or income from an unknown employer
Note: The IRS will not contact you by email, text message or social media.
The best recourse for tax-related identity theft is to beat the thief to the punch by filing as early as possible in the tax season. If early filing is not possible:
- Ask your tax preparer what sort of data protection he or she uses. If the answer makes you feel uneasy, look for another tax preparer.
- Change your passwords frequently on all accounts, make them strong and use a different password for each account.
- Don’t divulge your Social Security number or other personal information except where absolutely necessary.
- Use reliable anti-virus protection on your computer and all devices.
- Shred paper records before you throw them away.
- Don’t click on links in tax-prep software ads or email. Instead, go directly to the company’s website from a fresh browser screen.
- Reduce your refund by adjusting withholding on IRS Form W-4. Your interest-free loan to the U.S. government is not a great savings tool anyway, and the smaller the refund, the less aggravation it will be for you in the event your identity is compromised.
If You Are a Victim
If it’s too late to prevent tax-related identity theft, you may face a mountain of paperwork, additional preventative measures, reputation recovery and more. Instead of filing online, you may now need to file your return on paper. According to the IRS, ID theft cases generally take from four to six months to resolve.
Some things you can (or should) do:
- Place a fraud alert on your credit reports. Contact one of the three main agencies – TransUnion, Experian or Equifax – and that agency will inform the others. The net effect will be a “freeze” on opening new accounts without proof that the request came from you. A fraud alert lasts 90 days but can be renewed.
- File a complaint with the Federal Trade Commission at identitytheft.gov. You will explain your situation and receive a recovery plan and instructions on how to put that plan into action.
- Contact all financial institutions and close any accounts opened in your name by the thief.
- If your Social Security number was compromised, respond to any communication you receive from the IRS and go to IDVerify.irs.gov. You can only use this site if you have received a 5071C letter from the IRS.
- If your e-filed taxes were rejected due to a duplicate filing under your SSN, complete an IRS Identify Theft Affidavit (Form 14039).
- Request an identify-protection (IP) PIN. If you qualify, the IRS will send you a special PIN to file with your tax return next year. That return will have to be on paper.
- If the IRS does not approve your request for an IP PIN, there’s still a good chance the agency will subject your return to more scrutiny next year, simply because you requested the IP PIN.
- Continue to pay taxes and file your returns, even if you have to do it on paper.
The Government Is Taking Action
The IRS has been devising strategies to fight tax fraud. While most of these strategies are invisible to you, under-the-hood coordination has been described as “unprecedented” by observers. New safeguards have been enacted by the IRS and many state tax agencies.
When you prepare your return online there will be new log-on standards. Some states have taken additional steps, such as requiring driver’s license information. Connect to your state revenue agency website for details.
The Bottom Line
There’s nothing fun about being the victim of tax-related identity theft. Preventing an occurrence is always the best course of action, and the steps outlined here will help protect you against the likelihood – but not the possibility – of it.
Despite your best efforts, if you find yourself a victim follow the listed procedures and be patient. Repairing a breach like this takes time. Take heart. You can, in fact, be fully restored and protected against future events such as this one.
Copyright 2018 Investopedia, LLC. All rights reserved.