Editorial Policy

Protect yourself from tax refund fraud

Allie Johnson

February 24, 2015

In your mind, you've already spent your tax refund on a beach vacation, a new couch or your credit card debt. Then you get a nasty surprise: Your money really has been spent — by a criminal.

That's tax ID theft, which happens when a fraudster files a fake tax return in your name to try to snag your refund before you do. When you file, the IRS rejects your return. Then, you spend months sorting out the mess and waiting for your money.

In 2014, the Federal Trade Commission received more than 109,000 complaints about tax-related ID theft, which accounted for about one-third of its reported ID thefts, according to statistics released in January 2015.

The U.S. government likely will lose over $21 billion over the next five years due to stolen refunds, says Adam Levin, chairman and founder of IDT911.

“There's been a wave of tax-related ID theft,” Levin says.

Tax refund fraud: What you should know

A criminal needs just two pieces of information to commit tax ID theft: your name and your Social Security number, Levin says.

Criminals get that information in various ways: through retailer data breaches, hacking into personal computers, swiping tax forms from mailboxes and even posing as IRS agents on the phone. Once a criminal has your data, he can create a fake W-2 for you, Levin says.

Fraudsters usually e-file because it's quick and easy, says Kelley Long, a CPA and member of the American Institute of CPAs' National CPA Financial Literacy Commission. A typical fraudster might file hundreds of false tax returns in a year, Long says.

IRS procedures that make it convenient for consumers to get refunds also aid these criminals, Levin says. For example, the IRS processes refunds quickly — usually in 21 days or less — and offers several delivery options: paper check, direct deposit or loading the funds on a prepaid debit card. “Thieves prefer the prepaid debit card because it allows them to move much more quickly,” Levin says.

How to protect yourself

So what can you do to prevent a thief from making off with your refund?

“The minute someone has your Social Security number, they have an option on your life, and they will use that when it suits them.”
–Adam Levin, IDT911

1. Guard your personal information. If you do any tax-related work on your computer, use a strong, hard-to-decipher password, Levin says. And, as soon as you're done, save your documents on an encrypted thumb drive and remove them from your computer, he says.

2. If you get an odd email or phone call from someone purporting to be from the IRS, don't give out any information, Long says: “The first contact from the IRS is always going to be by mail — they're old-fashioned that way.”

3. Also, file your taxes early to beat crooks to the punch, Long says. “Filing early really is your safest bet,” she says.

What if tax identity theft happens to you?

If you fall prey to tax ID theft, here are five steps you can take to resolve the problem and protect yourself in the future:

1. Report the fraud. “The first thing you do is call the IRS,” Levin says. You can reach the IRS Identity Protection Specialized Unit at (800) 908-4490.You'll then have to prove you're a victim, Long says. The IRS might ask for information a thief probably wouldn't have, such as your adjusted gross income from a previous tax return, she says. “Then they'll know it's you,” she says. It could take six to 10 months to get the matter straightened out, Levin says, because of a backlog.

2. Get a PIN. The IRS will issue PINs to consumers who have experienced ID theft, Levin says. If the IRS doesn't offer you a PIN, request one, he recommends. After you get a PIN, the IRS won't accept future tax returns under your name and SSN without the number, Levin says.

3. File police and fraud reports. File a Federal Trade Commission ID theft affidavit and a police report, Levin recommends. With those documents, you can easily get a credit reporting agency to remove any information that appeared on your credit report as a result of ID theft, according to the FTC.

4. Check your credit report and accounts. Go to AnnualCreditReport.com to check your credit reports for free for suspicious activity. Also, regularly look over your bank and credit card accounts — Levin recommends a daily check.

5. Be vigilant. “The minute someone has your Social Security number, they have an option on your life, and they will use that when it suits them,” Levin says. A criminal who used your name and SSN to file a fraudulent tax return could later use it again in many ways, such as opening credit cards, committing crimes in your name or perpetrating medical ID theft, where they get doctor visits, pills or treatments in your name, Levin says. If you sign up for ID theft monitoring, look for a product that offers real-time alerts so you're notified instantly if anyone tries to open an account in your name, he says.

So, what about that refund? If your refund was stolen, the IRS will reissue the funds — to you, this time — after it determines that fraud has occurred. “The good news is you're not out any money,” Long says. “It's just a huge hassle.”