It’s nearly impossible to prevent fraudulent tax returns—or any type of identity theft, for that matter. That’s because criminals are five steps ahead of us. They’re always finding new ways to steal personal information and use it for their gain. They can hack into government agencies. They can intercept a previous tax return. They can retrieve your information from doctors’ offices. To file a fraudulent tax return, all they need is your name, date of birth, and Social Security number. It’s as easy as I-R-S.
But there’s hope. Here’s what you need to know about the IRS’s latest protective measures, what to do if you’re a victim of tax fraud, and other ways to help protect your identity.
The IRS: Stepping up its Game
The IRS recognizes that tax fraud is a big problem, and it’s working harder than ever to strike it down. From 2011 through October 2014, the agency stopped 19 million suspicious returns and protected more than $63 billion in fraudulent refunds. In 2014 alone, the IRS also initiated 1,063 identity theft-related investigations, resulting in 748 sentencing. (The average jail time is 43 months; the longest sentencing so far is 27 years.)
In 2015, the IRS says it added even more robust, pre-refund filters to identify suspicious returns. These filters stop most—but not all—fraudulent returns. The IRS also says it continues to expand its partnerships with financial institutions to crack down on this growing crime.
In addition, the agency is now limiting the number of direct deposit refunds to a single financial account or pre-paid debit card (the limit is now three). Any additional valid refunds are mailed to the taxpayer as paper checks. This limit is also stopping any tax preparers who improperly deposit client refunds into their own accounts.
What’s more, the IRS is reaching out to victims. While identity thieves steal information from sources outside the tax system, the IRS may be the first to tell you that you’re a victim of fraud. Most important is Letter 5071C, which the IRS mails to taxpayers to verify their identity if there’s a return filed with a duplicate Social Security number. (In other words, if you receive this letter, someone already filed a return with your information.) Once you verify your identity, the IRS will complete the processing of your return. Expect about six weeks for the IRS to complete the process and issue your (bonafide) refund.
Understand that some IRS cases are extremely tough to resolve, touching on multiple issues and multiple tax years. For instance, fraudulent activity may make it look like you owe more tax, or you received wages from an employer unknown to you. While the IRS is working to streamline its investigation process, a typical complex case can take 120 days to resolve.
You’re a Victim. Now What?
If you received the dreaded Letter 5071C, first make sure it’s legit. You should receive it only through the U.S. Postal Service; it will be mailed to the address on your tax return. The IRS will never email you, and they won’t call you without sending you the letter first. While you won’t appreciate getting the letter, you do need to respond. Otherwise, you won’t get your refund, and worse yet, you may be tagged as the scammer.
Letter 5071C gives you two options to confirm whether you filed the return:
- Call the toll-free number provided in the letter. However, if you’ve ever called the IRS and been on hold for what seemed like eternity, you may prefer the next option.
- Go to www.idverify.irs.gov. It’s a secure site and is by far the quickest way to verify your identity. Be aware of scammers directing you to bogus sites ending in “.com,” “.org,” “.net,” or anything other than “.gov.”
When verifying your identity, have your prior- and current-year tax returns handy, as well as your W-2, 1099, and other supporting documents. The IRS will ask you questions that only you can answer. Once you verify your identity, you can confirm whether or not you filed the return in question. If you didn’t file the return, the IRS will help you with the next steps.
If you’ve contacted the IRS but didn’t get any resolution, you can call the Identity Protection Specialized Unit at 1-800-908-4490.
But Wait. There’s More.
While Letter 5071C will help resolve the issue of your tax refund, remember that your identity is still stolen. It can still be used to open fraudulent accounts and lots of other sinister activities you don’t want your name attached to. Here are other actions to take right away:
- Complete fillable IRS Form 14039 at IRS.gov. It’s an Identity Theft Affidavit to request that the IRS tag your account. The IRS will give you a unique six-digit Identity Protection PIN (IP PIN), which you’ll use to prove you’re the rightful filer of future federal tax returns. The IRS will send you a new IP PIN each December by mail, and you’ll be required to use it in your filings.Note that the IRS is also offering certain taxpayers—who are unaware they are identity theft victims—the chance to opt into the IP PIN program because their accounts have suspicious activity. If you “qualify,” the IRS will mail you a CP01F Notice or another letter inviting you to opt in.Of course, don’t reveal your IP PIN to anyone other than your tax preparer.
- When the IRS mails you any notice, respond promptly. Remember, the IRS will always contact you through the mail.
- Continue to pay your taxes and file your tax returns, even if you must do so by paper.
- File a report with the local police. This is important for two reasons. First, most creditors require a police report to forgive debts caused by fraudulent activity. Second, the police report will boost your credibility with merchants and government officials should you run into future problems with your stolen identity. Most states have laws mandating police departments to file a report. Despite this, some law enforcement officials may try to dissuade you from filing; if this happens, contact your state Attorney General’s office.
- File a complaint with the Federal Trade Commission (FTC). Call the FTC Identity Theft Hotline at 1-877-438-4338 or TTY 1-866-653-4261. You can also visit www.ftccomplaintassistant.gov.
- Contact all three major credit bureaus to place a fraud alert on your credit records:
- Equifax: 1-800-525-6285, www.equifax.com
- Experian: 1-888-397-3742, www.experian.com
- TransUnion: 1-800-680-7289, www.transunion.com
- Close out any financial accounts—such as bank and credit card accounts—that appear on your credit reports which aren’t yours. Check your credit reports annually.
- Voluntarily freeze your credit. This will prevent scammers from opening new, fraudulent accounts. The freeze can be removed or temporarily lifted, when needed, at your request.
- Check your Social Security earnings statement annually for any strange reporting.
- Understand what type of personal information was stolen. Was it your name and date of birth? Your credit card number? Your Social Security number? Fortunately, not all data breaches or computer hacks result in tax-related identity theft. If you’re the victim of a data breach, reach out to the company in question and ask what they’re doing to protect you.
Minimize Your Risk
Even if you haven’t (yet) been the victim of identity theft—tax-related or not—you can take steps to help protect yourself:
- File your tax returns electronically if you can. When you file your return by mail—in an envelope clearly addressed to the IRS during tax season—it’s being touched by many hands at the U.S. Postal Service. It takes just one set of hands to compromise your mail. Instead, opt for the IRS’s e-file program, the safest way to file. (It’s also the quickest.) IRS e-file meets strict security guidelines with secure encryption technology to protect your tax return. The IRS has processed more than 1.3 billion e-filed tax returns from individuals since the program began.
- If you file electronically yourself, use a secure Internet connection. It may seem luxurious to file your return while sipping an espresso macchiato and using shared Wi-Fi at Starbucks, but anyone can tap in and access your information. (For that matter, never process personal information, including credit card numbers, on a shared Wi-Fi.)
- Shred any draft copies of your tax returns or calculation sheets you no longer need.
- Before hiring a tax preparer, do your research. Ask for recommendations from friends. Remember that you’re entrusting your tax preparer with a lot of confidential information.
- Keep your Social Security card in a safe deposit box at your bank. Carrying it in your wallet or purse is asking for trouble.
- Don’t give your Social Security number to a business—or medical facility—just because they ask. They really don’t need your number.
- Protect your personal information in your home. Make sure your computer is password protected and has firewalls and anti-virus software. Don’t leave bank statements lying on your desk. Think of where you can safely store your information should your home ever be broken into.
- Get in the habit of changing your passwords, and don’t use the same password for everything. Also, use strong passwords. Strong passwords are usually eight characters or longer, do not contain a real name or complete word, and contain a combination of uppercase letters, lowercase letters, numbers, and keyboard symbols.