Tax fraud is a major problem in the United States. From 2015 to 2018, the IRS detected a total of $24 billion in fake tax refunds.
The inability to file a tax return because it has already been filed, threats by phone or email requesting tax payment, and unusual demands from a tax preparer are all signs that you may be a victim of tax fraud. Here’s how to detect the signs and what you can do to fix it if you believe you are a victim.
What is tax fraud?
Tax fraud is the act of filing a tax return using a stolen identity and stealing the victim’s refund. Following Medicare and federal unemployment compensation, it is the third biggest abuse of federal funds.
With these three basic pieces of information:
- Date of birth
- Social Security number
a thief can commit tax fraud, resulting in lost or stolen refunds. Although a stolen refund may appear to be the worst outcome, criminals can also use the stolen identity to secure jobs, which can have a much stronger impact. When an identity thief uses your SSN to get a job, any money earned under your name will be documented.
So, if your earned income figures do not match up when you file your return, the IRS will flag your return as questionable. This can have serious financial consequences leading to an audit on your taxes and unnecessary stress.
Victims of tax fraud may also face stressful obstacles while trying to recover from a stolen tax return. Learning how this type of fraud works, as well as what to do if you find yourself in this position, is one of the most important steps in preventing your financial future from being adversely affected.
How do I know and detect the signs of tax fraud?
The following are the most common indications of tax fraud:
Your tax return has already been submitted
Unfortunately, you might not realize you’ve been the target of tax fraud until it’s too late. Here’s how it could play out. You file a tax return and await your refund. The IRS then sends you a rejection letter stating that your information has already been included in another return.
A tax form is sent to you from an anonymous employer
You receive a W-2 or 1099 report from an unknown employer. The IRS will also contact you to notify you that this employer has paid you.
You get an unexpected tax refund
Don’t get too enthusiastic if you receive a paper refund check in the post that you did not expect to get. It’s possible that a thief delivered it to you by mistake when they intended to send it to someone else.
The IRS requests that you confirm information
Supposedly the IRS suspects a fraudulent tax return. They will contact you asking to validate your identity with your name and social security number.
You owe the IRS more money but are not sure why
You may be a victim if the IRS insists you owe them more money, yet you can’t figure out why despite extensively checking your wages and deductions.
You hire a new tax preparer who has unusual demands
This may include requesting you to sign your return before it is done, not requesting W-2s, or requiring you to pay them instead of the IRS for tax payments.
The IRS contacts you and demands payment
The IRS will never contact you to request payment or personal information. They will also not contact you to inform you that they are involving law enforcement in an investigation of your tax return.
How to fix tax fraud?
Victims of tax fraud should take action right away. Follow the guideline below:
Contact the IRS
Confirm that a return was prepared using your details and notify the IRS that you are the victim of tax fraud. The IRS has a special unit called the Identity Protection Specialized Unit that will assist you.
Fill out the IRS identity theft affidavit
Fill out the IRS Identity Theft Affidavit (Form 14039). The IRS advises people to disclose tax identity fraud to local law enforcement, the Federal Trade Commission, and credit bureaus. They do not, however, require you to include those reports with Form 14039.
Submit your tax return.
If your return was denied, you should immediately file a tax return via mail, including Form 14039 and proof of identity. You should not put off filing. If the IRS receives the return after the tax deadline and you owe money, the IRS can levy a late-filing penalty regardless of the circumstances.
After following the steps above, the IRS will send you Letter CP01A in December or early January, each year. In this letter you will receive an Identity Protection Personal Identification Number, or IP PIN, which you will need to use to file your tax return. You can receive instructions on how to obtain an IP PIN via the IRS’s online retrieval system. You will be unable to register electronically without your IP PIN. Each year, you will be mailed a new IP PIN.
How do I protect myself from identity fraud?
Keep your data secure. Consider restricting the number of documents and IDs you carry, including your Social Security card, if possible. Documents containing confidential or important details, such as bank and credit card accounts and old credit cards, should be shredded.
If you are asked to include your Social Security number, inquire as to why this is required and how it will be processed. To better secure your sensitive information, you might request to disclose the last four digits of your SSN rather than the whole number.
Unfortunately, it is not always possible to avoid IRS identity theft. What you can do is reduce the chances of being a victim. Be mindful of the signs of tax fraud, keep your SSN secret, file your taxes early and use strong passwords to encrypt all of your accounts. Taking these precautions will save you time and money in the long run.