As with anything, when the majority of a population uses something, it usually becomes the target of malicious or criminal activity. Just ask Microsoft Internet Explorer engineers.
Now that over 78% of individual tax returns are e-filed with the IRS, the thieves have found clever ways to claim your tax refunds through fraudulent identity theft, as I alluded to in my guide on how to do your taxes.
E-filing had such a good thing going there for its users – quicker returns, easier to catch errors, no trip to the post office, and the peace of mind that your return reached its destination. And the IRS loves e-filing because they result in easier audit pulls, electronic data storage, and fraud detection.
But with their increased popularity and familiarity, e-filing identity-theft tax fraud has exploded. The Government Accountability Office estimates that in 2013, the IRS issued $5.8 billion in fraudulent tax refunds.
It has gotten so bad, that Turbotax shut down state tax returns for a day in 2015 because of a huge uptick in fraudulent tax returns, which has caused a number of states to stop accepting state e-filed returns. Hopefully, it is not related to the Anthem hack.
Why is E-Filing a Fraud Target?
And about that direct deposit thing… you might think that a deposit account would be traceable back to the perpetrator. Well, it turns out all you need is a prepaid card from any grocery or drugstore. They have routing and account numbers, making them look like a legit direct deposit, without any real traceability if paid for by cash.
So, if a defrauder has your Social Security number, and a means to accept a direct deposit, and they file before you, they can claim they are owed whatever refund they like – and it will be added to their account if they file before you.
Any re-course on behalf of the IRS that would result in you getting a proper refund could take months, if not years.
If that’s not motivation to file your tax return quicker, I don’t know what is.
How to Protect Yourself from Tax Identity Fraud
There is no way to ensure you are 100% protected from tax identity theft fraud.
If you’ve been a victim of identity theft, you’re a prime target for identity theft tax fraud.
And the message here is not that you go back to paper filing (which won’t help you at all).
Rather, you should follow a multi-pronged approach to avoid being a victim of tax identity fraud, and identity theft, in general:
- Protect your SS#: Always be extremely cautious about who you give your Social Security number to – and only disclose it when absolutely necessary. Outside of the government, your employer, and lenders, there are not too many parties that have a legit claim to know it. You can always say “sorry, I do not like to give out that number” when prompted. Also, keep your Social Security card in a safe place that only you can access – never your wallet or purse, in the event they are lost or stolen.
- Eliminate your Paper Trail: Get your own paper shredder and shred any paper documentation with personal identification information, especially your Social Security number.
- Withhold the Right Amount: Plan your withholding tax allowances so you don’t expect a big refund, in the first place. Remember, a refund is not a good thing – it means that you’ve been giving the IRS an interest-free loan on your money!
- Look for Suspicious Activity: Credit Karma has free credit report access and free credit monitoring, so you can take early notice if you’ve become a victim of identity theft by getting a lead on suspicious activity.
- Get there First: File your tax return as soon as you have all the information to do so to get your rightful refund before a thief claims a fraudulent one. E-filing allows you to submit quicker, ironically, which gives you a bit of an advantage. And if you pay taxes online, it allows you to get there even faster.
- Get a Confidential E-File PIN: You can request a confidential e-file PIN. Give it to no one.
If you believe you’ve been a victim of identity theft or get a notification of suspicious activity, contact the IRS Identity Protection Specialized Unit at 800-908-4490, so that they can take measures to protect your tax return from fraud. If you think you’ve been defrauded, you can also, open a case with the IRS using Form 911.
Tax Identity Theft Discussion:
- Have you been a victim of tax return identity theft fraud? Share your story.
- Do you have any additional tips on how to protect yourself from identity theft that could lead to tax fraud?