04/03/2012 02:57 pm ET Updated Jun 03, 2012

How Filing a Tax Return Reduces Identity Theft

When most people think of having their identity stolen, they tend to focus on some well-known tactics -- e-mail scams, stolen credit cards or "dumpster divers." But there is another growing way that thieves are getting access to your personal information, and it involves something that millions of Americans are doing right now -- filing their annual income tax returns.

In fact, last month the Internal Revenue Service reported that they had already flagged almost two million tax returns this year for possible fraudulent activity, including instances of suspected identity theft. With a few weeks still left to go until the April 17 tax deadline, odds are we will be seeing more of these unfortunate instances.

How exactly does this happen?

It's as simple as having someone get a hold of your social security number and personal information, and then using it to file a tax return under your name and identity -- typically with fabricated information and deductions, and a resulting fraudulent refund. Unfortunately, in many cases, the victim is unaware that this has happened until a tax return is filed, only to find that a return has already been submitted in their name with fake information. Affected taxpayers must then go through a longer, more complicated process, starting with a requirement to file an authentic paper return, which takes longer to process. In addition, they must wait an additional amount of time while the IRS investigates the identity of the taxpayer and confirms what has happened. Additional steps will also be necessary in future years using a new IRS issued ID theft Personal Identification Number that will have to be included on future tax returns.

The IRS is implementing its own fraud detection and prevention safeguards, and there are things that you, as a taxpayer, should do to keep your personal information out of the wrong hands in connection with the preparation of your tax return.

First, make sure you e-file, or electronically file, your tax return. By e-filing, only you and your tax preparer will be handling your documents. By e-filing, you avoid having a paper return handled by multiple parties as it is processed by the IRS, including the keying of your tax return data into the IRS system. The less people handling your information, the lower your chances are of having your personal information compromised.

Next, keep important documents, such as copies of tax returns, credit card statements, cancelled checks, paystubs and similar data in a secure location like a locked file cabinet, or scan the information into a secure computer or web-based document storage program.

Be sure to destroy documents older than four years. DO NOT simply throw them away -- destroy them or at least shred them.

Be cautious and vigilant when it comes to providing any personal information, such as your social security number, bank or credit account numbers over the phone or via e-mail, and avoid carrying your social security card in your wallet. Be aware that the IRS never communicates via e-mail. If you get an e-mail inquiry from someone claiming to be from the IRS, or if you get a phone call asking for you to e-mail personal information, do not provide these details without verifying the legitimacy of the request first.

Decline using your social security number as an identifying number on accounts. Very few organizations may legally require you to use your social security number.

If you suspect your identity has been stolen, contact the IRS right away. A resource can be found at IRS Identity Theft Hotline.

The bottom line: Prevention and protection up front will save you a great deal of trouble and time later should your personal information be compromised.