This article has been updated for the 2022 & 2023 tax years. As with anything, when the majority of a population uses something, it usually becomes the target of malicious or criminal activity. Now that over 92% 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 thieves attempted to claim $12.2 billion in fraudulent tax refunds in a recent year.
Why is E-Filing a Fraud Target?
No envelope, no fingerprints, no signature, and quick returns through direct deposits. That is why e-filing is a fraud target for identity thieves.
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 trace-ability 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:
- Create an Account with the IRS: an IRS account is one of the government accounts everyone should create. In it, you’ll be able to see what activity has taken place under your Social Security number and other important information.
- Apply for an IRS Identity Protection PIN: new in 2021, any taxpayer can get an IRS identity protection PIN. Previously, only those who could confirm that they were victims of identity fraud could do so. It’s free to do, and it acts as a 2-factor authentication for tax returns. After you create an account with the IRS, they will mail a 6-digit code to you that must be entered when someone submits a return for your Social Security number. This is, by far, the most fail safe measure to protect yourself from tax identity theft and fraud.
- 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. And even with those who need it for 1099s, for example, you can request an EIN from the IRS. 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.
- Combat Mail Identity Theft: sign up for USPS Informed Delivery ASAP in order to protect yourself against mail identity theft. When you sign up for Informed Delivery, you can digitally preview actual photographic images of letter-sized mail pieces that are in the process of being sent to your address or P.O. Box through email notifications, an online dashboard, and mobile apps. This way you know what to expect to receive in the mail, and if anything doesn’t make it to your mail box.
- Withhold the Right Amount: Plan your withholding tax amount 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. If you want to take things even further, take a look at LifeLock.
- File ASAP: 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.
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 1-800-908-4490, 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?