A few weeks ago, a friend of mine -- let's call her Mallory -- got an unsettling call from her accountant. The accountant had been preparing Mallory's taxes, hit "Send" to e-file the finished return, and it was rejected. Someone had already filed a tax return using Mallory's Social Security number. She'd been a victim of tax identity theft.
The accountant called the IRS, but they wouldn't talk to her. Mallory called and was directed to the fraud department. While she was on hold, she made more calls: one to a friend at the FBI, another to the FTC and the last one to me.
Mallory had just become a statistic. The aftermath of tax identity theft is messy, and since 2012, the number of victims has been on the rise. Millions of Americans who expected refunds--often desperately needed to make ends meet--have waited the better part of a year to get their money back -- and even then only after they had traversed a paper labyrinth to prove to the IRS they had been the victims of a crime.
Like many of us, Mallory thought she was doing everything she could to protect her identity from this kind of crime and, as a former senior banking executive, she probably was. Unfortunately, we live in a world where breaches -- and the resulting cases of identity theft -- are rapidly becoming the third certainty in life. Doing everything we can do is no longer good enough: too many organizations have too much of your information in databases that are too easily accessed by the wrong people.
Though most people don't know enough about this kind of crime, the IRS investigations of tax-related identity theft are up 66 percent since 2012. The agency says it has identified 14.6 million false returns and stopped $50 billion in fraudulent refunds since then, but the problem continues to grow. Victimization is so rampant that the two most popular DIY-tax software programs (H&R Block's Tax Software and Intuit's Turbo Tax) now offer a window for tax identity theft victims to input their IRS-issued Identity Protection PIN with their other identifying information.
So what happens if, or when, you become a victim of tax identity theft?
If you know for certain that your identity has been compromised, the IRS has a form for that. But if you've already lost your tax refund to an identity thief, their reporting mechanism may not be enough to resolve your existing case. If you know your information is in the hands of the bad guys, make sure you cover your bases with the IRS as well as the credit reporting agencies, the Social Security Administration and your creditors.
While the IRS knows how many thieves it caught, the Treasury's Inspector General for Tax Administration suspects that an additional 1.1 million fraudulent returns (and $3.6 billion in refunds) slipped through IRS filters in 2011. He also reported that the agency issued $183 million in tax refunds that year to identity thieves -- based on the 174,000 Social Security numbers that were used on multiple tax returns in 2011 -- after the criminals had submitted fake returns, before legitimate taxpayers legally filed.
If you are one of the unfortunate souls whose identity is compromised with the IRS, you might personally have to do the legwork, and it won't be easy. Mallory is quite experienced in navigating federal bureaucracies, yet still found herself being transferred multiple times and then held on hold by the understaffed IRS fraud department. She wasn't able to get a great deal of information, and her accountant wasn't allowed to help. Mallory only clarified the details of the theft when my colleagues at Identity Theft 911 got involved and a prepaid debit card (which had been ordered by the thief to receive the refund) showed up at the home of her parents.
If you find your efforts stymied, it's worth making a call to your insurance agent, bank or credit union representative, or the HR department at work to find out if they have a program to help policy holders, customers, members or employees resolve identity theft issues. You may want to enroll now if it's available, and you may be pleasantly surprised to find that it's free or can be had for a nominal cost depending on your relationship with the institution. It can be a game changer if you become a victim.
In cases where your return is blocked or a refund has been issued to thieves, or you are notified by the IRS that you significantly underreported your income (because someone else had obtained employment using your SSN), you'll have to have a police report to start the process of proving to the IRS that you are who you say you are and you've been victimized. Even then, with the backlogs you'll still spend plenty of time on the phone and with paperwork trying to work out a resolution to your case.
However, once you resolve your case with the IRS, don't assume that you're safe: if identity thieves have your name and Social Security number, they have a permanent option on your life that they can use at their convenience. Even if they are arrested and prosecuted, the nightmare isn't necessarily over. They may well have sold your information to others who will do more of the same.
- Get the free credit reports to which you are entitled every year. Thoroughly review them. Correct any errors and report suspicious activity to the fraud departments of the credit bureaus.
- Put fraud alerts on your credit files.
- Ask each of the three reporting agencies to freeze your credit.
- Visit sites like Credit.com, which provides a free top line view of your credit and free credit scores that are updated monthly. If something in your credit profile changes unexpectedly, and you can't explain it, you may have become a victim.
- Check your credit and bank accounts daily.
- Enroll in free transactional monitoring programs that are offered by your bank, credit union and credit card company so that you will immediately be notified of all activity in your accounts.
- Consider buying more sophisticated credit and fraud monitoring programs to keep track of changes in your credit or identity profiles.
- Find a personal damage control program to "have your back."