The days of filling out a paper tax return are over. Both professionals and do-it-yourself tax preparers use electronic filing methods. That, plus the timing of certain reporting deadlines, has created an opportunity for identity thieves.
We all know that the tax filing deadline for individuals is April 15. However, the deadline for employers to file a copy of the W-2 forms with the IRS (originally given to the employee in January) is in June. That means that the IRS cannot compare tax return information to the W-2 information until June. Prior to June, the IRS issues tax refunds on what is essentially the honor system. That lag gives identity thieves about 6 months to do their dirty work.
What identity thieves do is somehow get hold of someone’s name and Social Security number and file a phony tax return electronically. They direct the tax refund to their own address or bank account.
The IRS now has 3,000 employees working on identity theft issues. Even so, for the 2012 filing season, the IRS received about 3 million fraudulent tax returns, stopped $20 billion in fraudulent refunds, but admitted it paid out $4 billion in fraudulent refunds.
How can you tell if you have been victimized? There are a few indications.
The IRS will not accept your electronic filing, indicating that a return has already been filed using your Social Security number.
You receive an e-mail from the IRS. The IRS never initiates e-mails to taxpayers.
The IRS says you earned more than you really did.
The IRS or your state notifies you that more than one tax return was filed.
The IRS or your state notifies you about an unexpected refund, balance due, or collections legal action.
The U.S. Treasury Department released some other interesting information on this kind of identity theft. There are various kinds of victims and some are victimized more often than others. This list shows the number of victims of false tax returns for tax year 2010.
People earning too little to file tax return – 952,612
Students (ages 16 to 22) – 288,252
Deceased – 104,950
Elderly – 76,338
Citizens of U.S. Possessions – 67,789
Children (under 14) – 2,274
Preventing this kind of identity theft is the same as avoiding other kinds. Do not carry your Social Security card with you, or any documents that show your Social Security number. Give your Social Security number only to businesses that really need it. Check your credit report once a year. Keep your computer protected with passwords, firewalls and other defensive software. Do not give personal information to people who call you unsolicited.
If you are the unfortunate victim of tax return identity theft, you will likely need the help of experienced legal and accounting professionals to deal with the IRS and state tax authorities. Be sure to act quickly to avoid or reduce interest, penalties, tax liens, derogatory credit reports and other bad consequences.
Gary Schuster is Senior Counsel on the Business & Estates Team. He can be reached by phone at 866-303-9595 toll free or 845-764-9656 and by email.