Tax Related Identity Theft – A Growing Problem
In the past several years there have been a proliferation of high profile incidents involving theft of personal information at major businesses (and government!) in the US. A recent NPR story pegs the estimated number of people who have had their Social Security Number (SSN) stolen at up to 60-80 percent of all Americans! In other words, unless you are a hermit or recluse or wear a tin foil hat then chances are good your personal information is out there and exposed. This is big business for criminal enterprises and an ever increasing problem. The Government Accountability Office (GAO) recently released a report for tax year 2013 indicating approximately $30 Billion in ID theft related fraud was attempted with $24.2 Billion being “prevented or recovered”, leaving $5.8 Billion actually paid out to fraudsters.
Generally ID theft is discovered by a taxpayer when they attempt to file their tax return electronically and it is rejected due to a return already being on file for that SSN with the IRS. Often ID theft criminals will obtain enough basic information about a taxpayer to file a fraudulent return early in filing season. These returns are generally filed before February 15th and claim large refunds off of employment withholding and low wages. The refunds are direct deposited to prepaid debit cards which are hard to trace. Since the IRS does not receive your W-2 information from your employer until the March 31st deadline, the IRS cannot use the normal matching programs to compare your filing to the actual W-2 figures. Unless the phony return fails some of the IRS’ fraud filters, the return is accepted, the refund is issued, and the thief is off with the money.
So what can you do to prevent this? If you have direct knowledge of an incident in which your personal information may have been stolen, the IRS recommends that you 1) File a police report, 2) File an FTC complaint, 3) Contact one of the three major credit bureaus to place a fraud indicator on your account, 4) Close any bank or credit card accounts affected and 5) File Form 14039, Identity Theft Affidavit with the IRS. Once these steps are complete the IRS will place an ID theft flag on your account, and in December you should receive a CP01A Notice from the IRS with your 6 digit ID theft PIN. This special PIN must be used when e-fling your return, or it will be rejected.
Given the rise in major hackings of big businesses and government, our recommendation is to apply to the IRS for an ID theft PIN whether you have specifically experienced tax-related ID theft or not. Federal Form 14039 requires you to disclose whether you know you are a victim of an ID theft related crime and it is affecting your tax returns or that you have experienced an event involving your personal information and it may affect your tax records in the future. For all clients not directly affected by ID theft that has affected their tax filing, we recommend you file under the second checkbox. If you have shopped at Target, worked for the government since the mid 80’s, have Anthem as your health insurance provider, lost your wallet, or been a victim of any other of the numerous security breaches that have occurred in the past few years it is highly likely your personal information has been compromised and this may affect your future tax records. Form 14039 requires a copy of your driver’s license, passport, social security card or other valid federal or state issued identification to be included with your submission. The form may be either faxed or snail mailed to the IRS. We recommend you submit the form and retain a copy for your records as well, preferably with proof of filing as with any other correspondence with the IRS. If you do not receive notice CP01A by the end of December you should contact the Identity Protection Specialized Unit at the IRS at (800) 908-4490 to request your 6 digit ID theft PIN.
What about for the state? Many scammers are now targeting state returns more heavily in response to better fraud filters in place by the IRS. For some states, this may not be an issue as they “piggyback” on the federal return and will not accept your state electronic filing unless the federal filing is also accepted. However, for the states that do not require a valid federal filing you will need to go to that state’s department of revenue or tax commission website and search for ID theft to see what steps that state requires to place an ID theft flag on your account. For California residents, Form 3552 ID Theft Affidavit can be filed which is analogous to federal Form 14039.
Until the IRS and state governments come up with a more permanent solution, tax related ID theft will continue to be a problem. Using the steps we have recommended you can be proactive in protecting your tax account from ID theft and spare yourself the headache of the back and forth with the IRS and state governments that can occur when a fraudulent return has been filed using your SSN. With the recent decreases to IRS funding and personnel we may be waiting a while…
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