How to Protect Yourself from Tax Identity Theft

While tax season is an opportune time for identity thieves to ramp up their efforts of targeting tax returns, it’s important to remain vigilant year-round to protect yourself from tax identity fraud. Criminals are eager to follow the billions of dollars processed by the IRS each year, and all they need to file a fraudulent tax return and claim your refund is your name and Social Security number (SSN). Once a fraudulent return is submitted, the IRS or state tax authority will flag your legitimate return as a duplicate, leading to months of delays, headaches, and postponed refunds.

Identity thieves are also increasingly targeting larger entities like corporations, partnerships, estates, and trusts by using stolen information to file fraudulent returns. In some cases, criminals go even further by attempting to steal employee data to facilitate individual identity theft. To avoid falling victim to these schemes, it’s crucial to be vigilant and protect your personal and business information during tax season.

The IRS is Taking More Action on Theft

Due to the IRS taking more action in recent years, tax-related identity theft has substantially declined. For example, the IRS has worked to improve their computer systems by adding filters that can flag potentially fraudulent returns. The new system will look for anomalies in the filer's information, such as wage information that differs from what was provided by the employer or substantial differences in an individual’s return from one year to the next.

In addition, online tax preparers and software companies have implemented new measures to ramp up security when it comes to confirming their customers’ identities. These new measures include techniques like multi-factor identification—like password plus a text code sent to a user’s cell phone—to help verify their identity. From a business standpoint, the IRS now requires preparers to provide additional information to confirm that any return they submit is legitimate.

While these efforts have proven to be effective, tax identity theft still remains a threat. This threat of theft is why it is still so important to take the proper precautions to protect yourself.

Preventative Measures

In the case of individuals, the key to preventing any type of identity theft is to keep your SSN private. It is recommended that you never carry your Social Security card with you and never share your SSN with anyone unless absolutely necessary. Also, never provide your SSN via email, even in legitimate scenarios.

It is imperative to be on the lookout for phishing emails. These official-looking communications are specifically designed to look like they were sent by the IRS, your financial institution, or an executive at your company. However, these emails are actually from criminals and thieves in search of your SSN, bank account information, or personal passwords. You should never click on any links or attachments in emails unless you have verified that they are legitimate. Remember, your bank, the IRS, or any other legitimate business would never ask for your financials or additional personal information via email.

Here are some other steps you can take to protect yourself:

• Choose strong passwords for your computers, mobile devices, and financial websites and always change them regularly.
• Use proper anti-spam and antivirus software on your computers and ensure that you periodically check for security updates.
• On a regular basis, reconcile your bank and brokerage statements and review them for any potentially suspicious activity.
• Store bank statements and tax documents in a secure space when necessary, but shred them when they are no longer in use.
• Apply for an Identity Protection Personal Identification Number (IP PIN) as a proactive step to protect yourself from tax-related identity theft.
• Periodically review your credit report to check for any suspicious activity.
• After checking your mail daily, be sure to lock your mailbox and shred all credit card solicitations and any other mail that thieves could potentially use to obtain your SSN or personal information.
• When using public wi-fi networks, always exercise caution. If you have the ability, use a virtual private network (VPN) service to protect and encrypt all of the information that you transmit over the network.

Finally, consider filing your return as early as you can. If someone is able to obtain your SSN and attempts to file a fraudulent tax return in your place, filing first will prevent them from being able to claim a refund in your name.

It is essential that businesses take the proper steps to protect not only their own information but also the information of their employees. If you are a business owner, it would be beneficial to provide training to employees to help educate them on recent tax fraud schemes and how they can spot phishing emails. This training could also cover how to use secure methods to send W-2 forms to employees and how to implement new risk management strategies designed to flag suspicious activity and communications.

How to Respond to Theft

If you believe that you are a victim of tax identity theft:

• Begin by filing a complaint with the Federal Trade Commission (identitytheft.gov) and your local law enforcement.
• Contact your tax advisor, the IRS, and the three major credit bureaus to place a “fraud alert” on your credit records.
• Be sure to submit an Identity Theft Affidavit (Form 14039) to the IRS. After filing this form, you will receive a six-digit Identity Protection Personal Identification Number (IP PIN) for use in filing your electronic or paper returns.

If you suspect any of your accounts have been compromised or opened without your knowledge, it’s crucial to contact your financial institutions immediately and close those accounts.

Protecting yourself from tax identity fraud isn’t just a seasonal concern—it’s a year-round responsibility. For guidance on how to properly respond to tax identity theft, don’t hesitate to reach out to your CRI tax advisor. We’re here to help you safeguard your financial well-being every step of the way.