What is Tax-Related Identity Theft?

4 mins

What is Tax-Related Identity Theft?

Tax-related identity theft or tax fraud occurs when an identity thief steals a taxpayer’s identity to file for a fraudulent return and claim their tax refund. The identity thief uses a stolen Social Security number (SSN) and consumer information to file a forged income tax return early within the filing season, before the victim files. The scammer then receives the victim’s refund before the IRS processes the original filing. With paperless e-filing, the scam has become simpler than ever before. Identity thieves, who scheme and invent phony wages or other income, submit the knowledge electronically, and then receive the fraudulent refund via mail or direct deposit. The thief will have already cashed the refund check, or withdrawn it from the bank, by the time the theft is realized.

What is the Meaning of Tax Return Identity Theft?

Tax return fraud is the act of filing a return, employing a stolen identity, and taking the victim’s refund. It is the 3rd largest theft of all federal funds, after Federal Unemployment Benefits and Medicare. This kind of fraud is equipped with three simple ingredients: a reputation, birth date, and Social Security number (SSN), all of which allow the thief to commit tax fraud, leading to delayed or stolen refunds. While a swiped refund could seem like a worst-case scenario, thieves can also use an individual’s stolen identity to gain employment, causing even greater distress. When an identity thief uses a person’s SSN for employment, all the income they earn under their victim’s identity is reported. This means that once the victim files their taxes, showing that the earned income numbers don’t match, the IRS will flag the victim’s returns as suspicious. This will have significant financial impacts if taxes on the unclaimed earnings are imposed, and may well cause prolonged stress, with an invitation to audit the victim’s taxes.

How to Identify Theft Tax Return?

Most people don’t know they’re victims of tax identity theft/tax fraud until they file their tax returns and the IRS rejects them. Signs consumers have become a victim of a fraudulent tax filing include:

  1. Cases where more than one income tax return was filed and their return was rejected.
  2. When consumers have a due balance, their refund is offset, or they have had collection actions taken against them.
  3. When IRS records indicate that they received more wages than they really earned.
  4. If someone uses the victim’s SSN to urge employment, the employer may report that person’s income to the IRS using the victim’s SSN. IRS records will show that the victim did not report all of their income. The agency will send the victim a notice or letter saying, ‘You have received wages you didn’t report’.
  5. In cases where state or federal benefits were reduced or canceled, because the agency which was involved received information regarding an income change.
  6. An unexpected letter arrives from the IRS or Missouri Department of Revenue, which inquires about a tax return that the victim didn’t file.

How To Reduce the Risk of Identity Theft

Joint efforts by the IRS, states, and the tax industry are used to guard a person’s data. We all have a task to play when it comes to reducing tax identity theft. Here’s how a possible victim can get help:

  1. The individual should always use security software that has a firewall and antivirus protection, accompanied by strong passwords.
  2. They should learn to acknowledge and avoid phishing emails, threatening calls, and texts from thieves posing as legitimate organizations, such as their bank, MasterCard companies, and even the IRS.
  3. They should never attempt to click on links or download attachments from an unknown party or from a suspicious email.
  4. They need to protect their personal data at all costs. They should ensure that they don’t carry their Social Security card routinely, and confirm their tax records are secure.

How To Report Identity Theft

If a person discovers they, or someone they know, is a victim of tax identity theft, or tax-related fraud, they can take the following steps:

  1. Contact the IRS immediately. If a person receives a notice, they should respond immediately. They can also contact the IRS at their helpline number to secure their tax account and Social Security number (SSN).
  2. Complete and submit an IRS fraud Affidavit. IRS Form 14039, Fraud Affidavit, is a fillable form on the IRS website. It is filled out when an individual tries to e-file their taxes and gets rejected due to a replica filing. The victim must fill out and print the forms, attach it to the paper return, and mail everything to the IRS.
  3. Don’t stop paying taxes. Even during a possible tax-related fraud incident, the individual should continue to keep paying their normal taxes, and file their income tax return by paper.
  4. Contact the FTC. Once they’ve completed all these steps, the individual can start resolving things with the IRS, contact the FTC, and file a complaint via identitytheft.gov.
  5. Place a fraud alert on your credit record. The individual should contact one among the three major credit reporting companies (Equifax, Experian, TransUnion) in order to place a fraud alert on their credit report.

Unfortunately, even once these steps have been taken by the victim, there are still ways for criminals to steal and use their identity. Further, new tax scams are emerging every year. There also are IRS imposter scams and situations, where thieves steal the child’s Social Security number (SSN) and claim them as a dependent for the victim’s returns.

Read More: About the Financial Action Task Force (FATF) organization.
Read More: What is the role of Money Laundering Reporting Officers (MLROs)?
Read More: Which countries are stated in the FATF Grey List?

Time to reform your compliances

Kickstart your journey by exploring our products or request a demonstration with us

illustration tookitaki colors-09