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Tax identity theft occurs when a person steals someone else’s personal information and uses it without their permission to file a fraudulent tax return online and claim a refund. Early in the tax year, identity thieves use a stolen Taxpayer Identification Number (TIN) or Social Security number (SSN) to file false tax returns, claim repays, and have them automatically transferred into their accounts as soon as possible.
Between 2015 and 2019, the number of taxpayers who filed IRS identity theft affidavits to report a tax identity theft dropped by 80%. According to the Internal Revenue Service’s (IRS) most recent data, the annual confirmed cases of tax identity theft is around 140,000. In general, 40% of the victims become aware of the scam before the IRS, which means both taxpayers and the IRS must always be vigilant and execute their share of fraud prevention.
Con artists contact taxpayers by phone, text, or email pretending to be IRS officials. They try to scare gullible victims by claiming there are issues with their tax returns or back taxes they owe. If they don’t pay right away, they threaten with legal action, arrest, or a revoked license.
If your Social Security number (SSN) is compromised, lost, or someone stole your SSN card, they might try to file a tax return in your name. The IRS would then notify you about a duplicate return or in case of e-filing, they will reject your return since to them, it’s a duplicate filing.
Annually, millions of consumers’ identities are compromised in numerous data breaches. As their Personally Identifiable Information (PII) is sold on the dark web or on other black markets, cybercriminals buy it to impersonate the victims and fudge numbers to unfairly cash in refund checks.
The "Wage and Tax Statement" (known as the W-2) is sent by employers to employees every year before January 31. If a criminal intercepts or steals someone’s W-2 form or equally important letters/documents, they could file a bogus tax return and have repays re-routed to their account instead.
Cybercriminals use spear-phishing or email spoofing schemes called "CEO Fraud" and "Business Email Compromise" (BEC) to lure a company’s accounting, human resources, or payroll staff into revealing the W-2 details of all employees, including name, home address, SSN, date of birth, and salary.
Avoid unsecured public Wi-Fi networks, or use a Virtual Private Network (VPN) to protect your connection against Man-In-The-Middle (MITM) attacks. Don’t log into password-protected sites through open, unencrypted Wi-Fi networks because cyber thieves can capture and exploit your sensitive information.
Don’t disclose your SSN over the phone, via electronic devices, or to strangers. Only do it when it’s really needed and make sure the receiver handles it properly. Never use your SSN as a password. Keep your SS card in a fireproof lockbox at home or store it in a safety deposit box at your bank.
If identity thieves use someone’s personal information to obtain new credit cards, checks, or open new credit accounts, a credit monitoring service can promptly notify them. To prevent even more, people could freeze or lock their credit reports if they’re not planning on applying for new loans.
Identity theft monitoring refers to the process of scanning the dark web for leaked data or data breaches. In case someone’s personal information has been compromised, the identity theft monitoring service can alert the victim, winning them time to respond fast and minimize the negative impact.
From 2021, the IRS allows taxpayers to demand an Identity Protection PIN (IP PIN). After a rigorous verification process, the IRS mails users their IP PIN for the year. Any tax returns with the correct information, but an invalid IP PIN will automatically be rejected.
The IRS only allows one tax return per SSN per year. By filing your tax return early in the tax season (as soon as January 31), identity thieves won’t get the opportunity to try and submit your data because any other forms filed in your name later in the year will automatically be rejected.
If you need to hire a tax professional, do your homework. Take your time, ask for references, get recommendations, and read customer reviews before handing over your financial information. Make sure the person/business you pick is legitimate and can keep your sensitive data secure.
In 2020 Identity theft (IDT) tax refund fraud was the 5th most common type of identity fraud. The IRS received almost 90,000 reports, which is 7.3%, with the other stolen identity crimes being:
According to the Federal Trade Commission (FTC) Consumer Sentinel Network, in the first three quarters of 2020 there were 92,620 reports of employment or tax-related identity theft or fraud. Overall, tax identity theft is less common than other types of identity fraud and has declined in prevalence in the past years, due to the IRS actively identifying and blocking suspicious returns. In 2019 alone, the IRS stopped 443,000 fraudulent refunds from being processed, saving the taxpayers $1.9 billion in hijacked refunds.
It’s extremely important to recognize common signs of tax identity theft, such as:
After the IRS receives an identity theft report from a taxpayer they’re committed to solving the case between 120 and 180 days but depending on the circumstances, it could take up to one year or even more. They assess the claims, correct the fraudulent actions, and take cautionary steps to prevent similar crimes from happening again. Here are the steps they usually follow:
If you’ve verified your identity with the IRS, it could take up to 9 weeks for a refund to reach your account. However, a victim of tax-related identity theft should expect delays of weeks or even months since the official period allocated by the IRS to solve a stolen identity tax fraud adds between 120 and 180 days to the initial timeframe.
If you've been subjected to tax identity theft, here’s what you need to do next:
If someone knows your Social Security number or other personally identifiable information, they could send a forged tax return in your name and claim a refund as early in the tax filing season as possible. Thanks to the simplified paperless e-filing, by the time the victim files their tax return, the refund has already been processed by the IRS in favor of the scammer. Thieves just need to make up wages and numbers to pull it off.
A W-2 phishing scam starts with a fraudster who impersonates a company’s CEO and sends an urgent and very convincing email request to their staff, requesting all the employee tax information for W-2 Forms. They usually want all the data in one file. The tone is very direct, polite, and the information is needed straight away, for instance: "Kindly send me the updated list (PDF) of our company’s employees with full details (Name, Social Security Number, Home Address, Date of Birth, Salary) for a quick review." Most targeted victims are payroll service providers, public schools, hospitals, companies, non-profits, universities, but at some point, even government cybersecurity contractors fell victims to this con.
When someone is guilty of identity theft, they’ve only stolen someone’s personal data, while aggravated identity theft occurs when the information is used to commit a crime. The aggravated offense takes place when someone knowingly possesses, transfers, or uses, without lawful authority, a means of identification of another individual to commit certain felony violations. Depending on the gravity of the offense, someone who is convicted for an identity theft crime can spend time even up to 30 years in federal prison. If the theft is considered a misdemeanor, they could expect up to one year in jail plus fines.
Since no one is safe from tax identity fraud, an option that enhances someone’s protection would be to enable different types of monitoring and keep under strict observation a person’s credit, SSN, and identity data, while companies can scan their EIN numbers (the company tax id). After each IDStrong scan, you will learn if/when your sensitive data was compromised and if it circulates on the dark web or is sold via black markets.
Here are some precautionary steps that could safeguard your identity and your tax returns from tax thieves: