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Avoiding Tax Refund Identity Fraud

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Many people file their income tax returns as early in the year as possible. Some are eager to claim their tax refund right away, while others are simply following their New Year's resolution not to procrastinate until midnight, April 15.

Let me add another good reason to file your taxes right away: tax refund identity fraud.

That's where someone uses your Social Security number (SSN), birth date and other private information to file a fraudulent income tax return in your name and then pockets the resulting tax refund. Often, a victim's first clue is a letter from the IRS contesting their legitimate tax return, saying one has already been processed under that name. It can take months -- and mounds of paperwork -- to unravel the mess.

This scam has proliferated in recent years thanks to a confluence of events:
  • There's a thriving black market in personal information stolen from healthcare facilities, nursing homes, schools, insurance companies and other institutions that require an SSN as identification. (Even identities of children, dead people and prisoners are being hijacked.)
  • The IRS is pressured to begin issuing refunds shortly after taxpayers start filing returns in mid-January, even though employers and financial institutions aren't required to submit withholding and income documentation until the end of March. Thus, disparities often aren't caught until months later.
  • The growing popularity of electronic filing, where hard-copy documentation (like W-2 and 1099 forms) isn't required.
  • Many people receive refunds via direct deposit and prepaid debit cards. Criminals open and close accounts using bogus addresses long before the theft has been detected.
Thanks to severe budget cuts and chronic understaffing -- not to mention constantly playing whack-a-mole with thieves who dream up new schemes -- the IRS is hard-pressed to keep up. In one extreme example, the agency issued more than $3.3 million in refunds for 2,137 tax returns filed to a single address. In another case, 590 refunds totaling more than $900,000 were deposited into a single bank account.

But all is not lost. Working with the Justice Department's tax division and U.S. attorney's offices around the county, the IRS has significantly beefed up its fraud-prevention efforts. In 2011, they intercepted nearly 262,000 fraudulent tax returns seeking almost $1.5 billion in refunds related to identity theft. And the IRS now issues Identity Protection Personal Identification Numbers to impacted taxpayers to protect their future tax filings.

So what should you do if you've been victimized? Typically, the IRS will send you a notice that:
  • More than one tax return for you was filed;
  • You have a balance due, refund offset or have had collection actions taken against you for a year in which you didn't file a return; or
  • IRS records indicate you received wages from an employer you don't recognize. This could indicate that someone has used your personal information to get a job.

If you receive such a notice, don't ignore it. Complete an IRS Identity Theft Affidavit and return it with a copy of the notice to the address provided on the notice. If you did not receive a notice but believe you may be at risk, the form contains separate submission instructions. You can also contact the IRS Identity Protection Specialized Unit at 800-908-4490.

The IRS's Identity Protection website includes tons of helpful information, including ways to tell whether your identity may have been stolen, how to report a breach and tips to avoid identity theft.

Here are several ways to minimize your chances of being victimized:
  • Don't carry your Social Security card or any documents containing your SSN.
  • Don't give a business your SSN just because they ask. Give it only when truly required.
  • Regularly check your credit reports for errors or fraudulent activity.
  • Protect your computer by using firewalls, anti-spam/virus software and updated security patches, and frequently changing passwords for Internet accounts.
  • Don't give personal information by phone, mail, email or Internet site connection unless you initiated the contact or are sure you know with whom you're dealing.
  • The IRS never initiates contact by email to request personal or financial information, or to alert you to an upcoming audit or refund. If you receive suspicious-looking IRS-related communications and aren't sure what to do, visit the IRS Report Phishing website for instructions.
  • Use a strong password when filing your tax return electronically and use only a secure network connection -- no public Wi-Fi networks. Once e-filed, save the return and any back-up documentation to a flash drive or CD and delete them from your hard drive. If you're working with an accountant, ask about their security measures.

And finally, file your tax return as early as possible to beat potential scammers to the punch. If you owe money, you can always file your return now and mail the payment by the April 15 deadline.

This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.

To participate in a free, online Financial Literacy and Education Summit on April 17, 2013, go to Practical Money Skills for Life.