Tax-Related Identity Theft: What You Need to Know

5 mins

Tax-related identity theft is a growing concern for individuals and financial institutions alike. This type of identity theft occurs when a fraudster uses someone else's personal information, such as their Social Security number, to file a fraudulent tax return and claim a refund. This blog post will explore the problem of tax-related identity theft, its consequences, and how Tookitaki's Financial Crime Compliance solutions can help financial institutions protect themselves and their customers.

The Growing Problem of Tax-Related Identity Theft

In recent years, tax-related identity theft has emerged as a significant concern that has caught the attention of financial institutions, regulators, and the general public. The US Federal Trade Commission (FTC) revealed that in 2020, tax-related identity theft cases ranked second among all identity theft complaints, highlighting the severity and growing prevalence of this issue. This form of identity theft has widespread consequences, affecting both individuals who fall victim to the crime and the financial institutions that become inadvertently involved in processing fraudulent tax returns.

The Internal Revenue Service (IRS) of the US has recognized the gravity of the problem and has included tax-related identity theft in its list of "Dirty Dozen" tax scams, which are the most egregious and persistent forms of tax fraud. In response to this growing threat, the IRS has implemented a range of measures designed to identify and combat tax-related identity theft, including increased security protocols, enhanced data analytics, and collaboration with state tax agencies and the private sector to identify potential fraud.

Despite these efforts, the ever-evolving tactics used by cybercriminals continue to challenge the effectiveness of current measures. As such, it is crucial for financial institutions and individuals alike to stay informed about the latest trends in tax-related identity theft and take proactive steps to protect their sensitive information from falling into the wrong hands.

How Tax-Related Identity Theft Occurs

Criminals employ various methods to obtain an individual's personal information, intending to use it for fraudulent purposes. Data breaches are a common avenue for acquiring sensitive data, where cybercriminals exploit vulnerabilities in a company's security system to gain unauthorized access to confidential records. Phishing scams, on the other hand, involve the use of deceptive emails or websites designed to trick unsuspecting individuals into revealing their personal information. Social engineering tactics are another technique employed by criminals to manipulate victims into divulging sensitive data, often by impersonating a trusted authority figure or organization.

Once criminals have successfully acquired the necessary personal information, they proceed to file a fraudulent tax return in the victim's name, with the intent of claiming a refund. Often, these malicious actors submit the false tax return early in the tax season to ensure that the real taxpayer has not yet filed their legitimate return. In many instances, the victim remains completely unaware of the fraud until they attempt to file their own tax return. At this point, they may receive a notice from the IRS stating that a return has already been filed using their Social Security number, indicating that they have fallen victim to tax-related identity theft. This can lead to significant delays in the processing of the victim's genuine tax return and the eventual receipt of their refund.

The Impact of Tax-Related Identity Theft

Tax-related identity theft can have serious repercussions for individuals who fall victim to this type of fraud. One immediate consequence is the delay in receiving their tax refunds, as the IRS must first resolve the issue before processing the legitimate tax return. This can be particularly distressing for those who rely on their refunds for financial stability. Additionally, tax-related identity theft can have a negative impact on the victim's credit score, as the fraudster may open new lines of credit or take out loans in the victim's name. The process of repairing one's credit and proving their identity to the IRS can be a lengthy and arduous ordeal, causing significant emotional distress and financial strain.

Financial institutions, too, can suffer the consequences of tax-related identity theft. If they are perceived as having inadequate security measures or failing to detect and prevent such fraud, they may face reputational damage and a subsequent loss of customer trust. Clients may choose to switch to other financial institutions that they believe are better equipped to safeguard their personal information.

Furthermore, financial institutions may find themselves subject to regulatory penalties if they do not take appropriate steps to combat tax-related identity theft. Regulators expect these institutions to implement robust anti-fraud measures and may impose fines or other sanctions if they deem the institutions' efforts to be insufficient. This can lead to significant financial losses and further reputational harm for the financial institution in question.

How Financial Institutions Can Combat Tax-Related Identity Theft

There are several steps financial institutions can take to protect themselves and their customers from tax-related identity theft:

  • Implement robust customer identification and authentication procedures: Financial institutions should have strong Know Your Customer (KYC) processes in place to verify the identity of their customers when opening accounts or conducting transactions.
  • Educate customers: Financial institutions can provide resources and guidance to help their customers understand the risks of tax-related identity theft and how to protect their personal information.
  • Monitor transactions for unusual activity: By using advanced analytics and transaction monitoring systems, financial institutions can detect patterns of suspicious activity that may indicate tax-related identity theft.
  • Collaborate with law enforcement and other financial institutions: Sharing information about tax-related identity theft cases and best practices can help financial institutions stay ahead of emerging threats.

How Financial Crime Compliance Solutions Can Help

Technology plays a crucial role in combating tax-related identity theft, as it provides innovative tools and methods to detect, prevent, and resolve such fraudulent activities. Advanced analytics, artificial intelligence (AI), and machine learning (ML) algorithms can be employed to analyze large volumes of data and identify patterns or anomalies that may indicate potential tax fraud. For instance, these technologies can help detect suspicious activities such as multiple tax returns filed using the same Social Security number, or tax returns with inflated income or deductions that do not align with the taxpayer's historical data. By leveraging technology, financial institutions and tax authorities can more effectively and efficiently monitor and analyze tax-related data, enabling them to respond more quickly to potential identity theft cases and minimize the impact on victims.

Moreover, technology can also aid in enhancing the security measures used to protect sensitive taxpayer information. Strong encryption protocols, multi-factor authentication, and secure data storage can help safeguard personal data from unauthorized access and potential data breaches. Financial institutions and tax authorities can also utilize technologies such as blockchain to ensure the integrity and immutability of data, making it more difficult for criminals to tamper with records. By investing in and embracing these cutting-edge technologies, financial institutions, and tax authorities can stay one step ahead of cybercriminals, minimize the risks associated with tax-related identity theft, and ensure a safer and more secure environment for taxpayers.


Tax-related identity theft poses a significant risk to individuals and financial institutions, and it's crucial for financial institutions to take proactive measures to protect themselves and their customers. By leveraging Tookitaki's Financial Crime Compliance solutions, financial institutions can strengthen their defences against tax-related identity theft and ensure the safety and trust of their customers. Don't wait until it's too late – book a demo with Tookitaki today to discover how our Anti-Money Laundering Suite (AMLS) and the Anti-Financial Crime (AFC) Ecosystem can safeguard your institution from tax-related identity theft and other financial crimes.