Tax Identity Theft: How It Happens and How to Stay Safe

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Written By kevin

A financial strategist with a knack for demystifying taxes and insurance, Kevin distills complex concepts into actionable advice.

Tax identity theft has been on the rise in recent years. According to the Federal Trade Commission (FTC), this prevalent form of fraud affected over 89,000 people in the United States in 2020 alone. With tax season underway, it is crucial to understand what tax ID theft entails and how to safeguard yourself.

What is tax identity theft?

Tax identity theft occurs when criminals file fraudulent tax returns using stolen personal information. Most often, they use Social Security numbers obtained illegally to submit fake returns and claim refunds. As the IRS processes returns on a first-come, first-served basis, the real taxpayer is unaware until they go to file their genuine returns. By then, the scammers had made off with potentially thousands of dollars owed to the taxpayer.

How does tax identity theft happen?

Identity thieves use various techniques to steal the personal data required to perpetrate this fraud.

  • Phishing scams: Criminals send fake emails or text messages posing as the IRS, tax companies, or banks to deceive victims into revealing sensitive information like SSNs and bank account details.
  • Data breaches: When organizations that store personal data like SSNs suffer cyberattacks, this information ends up for sale on the dark web. Fraudsters buy it and use it to file false returns.
  • Stealing mail and documents: Thieves steal tax documents, bank statements, etc. from mailboxes and use them to commit identity theft.
  • Hacking tax preparers: Cybercriminals attack accounting firms to steal thousands of clients’ information. In 2022, the IRS issued warnings after over 300 tax practitioner data breaches compromised over 700,000 identities.

Signs You May Be a Victim

If identity thieves have used your information to fraudulently claim tax refunds, you may experience the following:

  • An IRS notice stating more than one tax return has been filed in your name.
  • Significant refund delays without explanation, potentially due to scammers claiming your refund first,.
  • An IRS notice about income from an unknown employer. This may signal false information submitted under your SSN.
  • IRS letters about discrepancies found in filed tax returns.
  • Unfamiliar charges or withdrawals from your bank account indicate financial information misuse.

Preventing Tax Identity Theft

While you cannot control external data breaches, you can take precautions to minimize your risk:

Secure Your Personal Information

  • Store tax documents and records securely at home by locking them away. Shred the files when disposing of them.
  • Never disclose sensitive information like SSNs or bank details to unknown callers or emails claiming to be from the IRS or collection agencies.

Practice Online Safety

  • Ensure all devices have up-to-date antivirus software and firewalls installed.
  • Avoid unprotected public Wi-Fi when accessing sensitive accounts. Public connections facilitate data theft.
  • Enable two-factor authentication (2FA) on email, banking, tax, and social media accounts. 2FA requires an additional step, like an SMS code, when logging in from new devices.

File Early

Submitting your tax return as early as possible gives criminals less time to file a fake one in your name first.

Monitor Financial Accounts

Check bank statements regularly for unfamiliar charges indicating potential identity theft. Consider signing up for account monitoring through your bank to track transactions.

What To Do If You Become a Victim

If you suspect or confirm tax identity theft, act quickly to minimize damage.

1. Respond to All IRS Notices Promptly

If the IRS flags discrepancies between legitimate and fraudulent returns filed using your information, they will send a notice. Respond to all notices immediately and follow the provided instructions.

2. Complete the IRS Identity Theft Affidavit

Form 14039 documents your case for the IRS. Print, fill out, and return to the address listed on the form with copies of your ID. This flags your account to prevent further fraudulent activity.

3. Contact Credit Bureaus

To get ahead of potential identity theft, notify credit bureaus (Equifax, Experian, and TransUnion) to place a fraud alert on your name.

4. Report It to Authorities

Notify the IRS Identity Protection Specialized Unit (IPSU) via their online form or 800-908-4490 to file an official report. Reporting to the FTC at also adds additional fraud monitoring protections.

5. Update Passwords and Enable Account Monitoring

Once accounts are compromised, thieves may continue attempting to access them. Change passwords across accounts and set up transaction monitoring.

By identifying warning signs early and acting swiftly to notify authorities, you can contain the damage from tax identity theft. Consider proactive precautions like filing taxes early, using secure connections, and protecting your personal data to reduce the likelihood of becoming prey to opportunistic fraudsters.

Tax Identity Theft Continues to rise.

Despite increased IRS security measures and scam awareness campaigns, tax identity theft victim reports have risen nearly 65% since 2019. The shift to remote work and e-filing due to the pandemic is likely to enable more breaches by expanding the digital attack surface.

Cybercriminals show no signs of slowing these lucrative attacks. With over 1.4 billion individual records containing personally identifiable information stolen in 2022 alone, experts warn taxpayers to brace for an especially intensive tax scam season in 2023 and 2024.

Implementing preventative safeguards is more vital than ever. While the IRS has sophisticated fraud filters in place, early vigilance on the taxpayer’s part considerably improves outcomes.

Helpful Resources

For more information and guidance on tax identity theft protections, visit the following IRS webpages:

Stay alert to evolving tax scams and ensure your information remains secure with the IRS Security Summit Tax Tips newsletter.

By understanding the nature of tax identity theft risks, maintaining best practices regarding sensitive data, and acting swiftly if compromised, you can empower yourself against this prevalent threat. Tax season will only grow more perilous as fraudsters refine tactics, but forewarned and proactive taxpayers can foil their efforts.

Categories Tax