Every year we have clients that experience tax related identity theft.  It usually happens like this:   Shortly after we file a client’s tax return, we receive a notice from the IRS that a return has already been filed for that taxpayer.   When this happens, the taxpayer has probably been a victim of tax related identity theft.

The typical tax related identity theft scheme involves someone obtaining a taxpayers information and filing a false tax return claiming a refund and having that refund sent to a coconspirator either by paper check or electronic means.  The IRS has published many examples of individuals prosecuted for participating in such schemes.  Many of these thieves received millions of dollars.

IRS Preventative Measures

To stop identity thieves in advance, the IRS increased the number and quality of identity theft screening filters intended to spot fraudulent tax returns before refunds are issued. The IRS has dozens of identity theft screens now in place to protect tax refunds. In 2012 these efforts helped the IRS prevent $20 billion of fraudulent refunds, including those related to identity theft, compared with $14 billion in 2011.

A typical tax related identity theft case can take about 6 months to resolve. The IRS is also stepping up outreach to taxpayers to prevent and resolve tax-related identity theft issues. Resolution of identity theft cases can be complicated by the thieves themselves calling the IRS caseworker.

Tax Related Identity Theft Guidance

Taxpayers may suspect someone else is using their information to file false tax returns or seek employment if they receive an IRS e-file reject message regarding an unknown tax return filed using the individual’s SSN, a notice or tax bill related to unknown income, or a notice regarding an audit that is not related to the individual’s tax situation. The approach to take depends on whether or not the taxpayer has filed a tax return related to the IRS notice or message.

1.  If the taxpayer has not yet filed a return for the year referenced in the IRS notice or message, the taxpayer should file the return, attaching Form 14039 and identity documentation.
2. If the taxpayer has already filed a tax return for the year referenced in the notice or message, he or she should respond (to the address on the notice or message) with a letter that addresses each issue on the IRS notice or message, attaching identity documentation.

How the IRS Can Help Identity Theft Victims

 The IRS takes several actions to help identity theft victims, including issuing personal identification numbers (PINs) to validate returns. The IRS mails a notification letter to the taxpayer within 90 days after it receives Form 14039 and the required documentation, and it records the contact on its accounts management system.

The IRS issued more than 770,000 identity protection PINs (IP PINs) at the beginning of the 2013 tax season in confirmed identity theft cases. An IP PIN is a six-digit number that is systemically assigned to validate the true taxpayer’s identity. It can be used only once for filing either an electronic or paper return. (A new IP PIN is issued automatically on an annual basis.)

Tax related identity theft is real and growing. More information on how to minimize your risk can be found here.