What Everyone Needs to Know About Tax Identity Theft
It’s tax season and millions of Americans are busy gathering documents as they get ready to see their tax preparers. Unfortunately, after they have filed their taxes, many will also learn they are victims of tax identity theft.
As you might have read by now, the statistics about the rise of tax identity theft/fraud are staggering. According to the IRS, nearly 3 million fraudulent returns were filed in the 2015 tax season. The agency also revealed that more than 700,000 taxpayers may have had their personal information compromised in a data breach discovered last May of the IRS “Get Transcript” web application.
Already, we are looking at more than 1 million taxpayers whose identities have been compromised, and we’re not even done with tax season yet.
Identity theft occurs in many different ways, but the US Department of Justice has found that stolen identity refund fraud crimes often are committed by large criminal enterprises that enlist individuals along the way. They steal information from hospitals, nursing homes, public death lists, and more. They then use the stolen information to file fraudulent tax returns and eventually receive tax refunds. When the real taxpayer attempts to file an income tax return, he or she learns of the identity theft.
What Can Be Done?
Everyone – consumers and tax professionals – must, first and foremost, educate themselves about identity theft. The most common mistake is failing to protect personal information. Experts suggest that consumers limit the amount of data they enter online. They also advise that consumers don’t share their personal data online unless they implicitly trust the person or entity that will be preparing their taxes.
Taxpayers also should increase their password difficulty, as many still use something that’s easy to remember (and to hack), such as birthdays, wedding anniversaries, and the numbers 1 to 5, or worse – the word “password.”
Because phone and email scams proliferate during tax season, it’s also a good idea to pay attention to the news and be on-guard against such scams. In the phone scam, taxpayers receive a call from someone who claims to work for the IRS. The scammer may demand a monetary payment or seek personal information. Red flag alert!
If there is ever a problem or concern, the IRS typically initiates contact only via US postal mail. The official piece of mail will outline why the agency is contacting taxpayers and include a request for action. If such a letter is received, tax preparers can initiate communication with the IRS.
Fortunately, companies are going the extra mile for their customers, enacting tougher safety measures, such as identity verification standards for online tax preparation. Software providers will also share information with the IRS on how long it takes a taxpayer to create a tax return. This should help identify computer-generated tax returns that are fraudulent.
Here is a checklist you can share with your clients on how they can better protect themselves against tax identity fraud and steps they can take if their identity has been compromised.
Tips to protect against fraud:
- Change your passwords often and make them unique.
- Don’t leave old tax documents or other papers with your Social Security number lying around. Keep these documents and other personal information in a safe, locked location.
- Give personal information over encrypted websites only (look for the “https” prefix in the address).
If a person’s identity has been stolen, here are some steps to prevent further damage:
- File a police report and request a copy of the report or the report number.
- Contact one of the three credit bureaus (Equifax, 1-800-525-6285; Experian, 1-888-397-3742; TransUnion, 1-800-580-7289). Have a fraud alert placed on the account or credit file and ask for a complimentary copy of your credit report.
- Create an identity theft report. Contact the Federal Trade Commission and submit a theft report. Print and keep a copy of the report because it may be necessary when dealing with debt collectors.
- Contact your bank or financial institution and discuss whether to close existing accounts and open a new one with a new account number.
- Contact your tax preparer and the IRS Identity Protection Specialized Unit at 1-800-908-4490.
Because of this increase of fraudulent activities, the IRS, tax-preparation companies, and state agencies are working together to safeguard every taxpayer’s identity and protect their personal information.
No one is immune to identity theft, but as long as we’re properly armed for battle, the war can be won.
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Jim Wheaton is general counsel, chief compliance officer, and vice president of legal and governmental affairs for Liberty Tax, based in Virginia Beach, Virginia. He joined the company in 2011 and previously was a partner with the law firm Troutman Sanders LLP. He leads...