Is Your Refund at Risk?

The clock is ticking to file 2012 income tax returns in the U.S., and if you haven’t filed yours yet, you might not want to wait around too much longer. Filers have bigger things to worry about than whether they’ve maximized their refund; specifically, the threat of someone stealing their identity and filing their tax return before they do.

March 2013

By Catherine Lofland, CPA

 

The clock is ticking to file 2012 income tax returns in the U.S., and if you haven’t filed yours yet, you might not want to wait around too much longer. Filers have bigger things to worry about than whether they’ve maximized their refund; specifically, the threat of someone stealing their identity and filing their tax return before they do. If you do fall victim to such a scheme, your refund could be delayed for six months or more — plus the time spent trying to convince the Internal Revenue Service (IRS) that you are who you say you are.

 

Tax refund identity fraud is a significant issue facing taxpayers today, thanks to the ever-increasing availability of personal information. For fiscal year 2012, the IRS’s identity theft unit received 78 percent more complaints than in 2011. According to a 2012 report from the Treasury Inspector General for Tax Administration (TIGTA), potentially fraudulent tax refunds issued totaled in excess of $5.2 billion during the 2011 filing season. TIGTA arrived at this figure by identifying approximately 1.5 million returns that the IRS failed to detect as fraudulent, but that had the same characteristics as returns confirmed as filed by identity thieves.

 

There are several reasons that the IRS failed to detect so many fraudulent returns. First of all, the agency is understaffed due to budget cuts. Secondly, crooks continue to get better at making fraudulent returns appear legitimate, especially with the popularity of electronic filing. And finally, the agency is under a great deal of pressure to process returns as quickly as possible. The goal for the 2012 filing season is to deliver 90 percent of refunds within 21 days. Since the IRS processes over 140 million tax returns each year, detecting fraudulent returns while also issuing prompt refunds is a tall order.

 

The good news is that the IRS has strengthened its identity theft prevention processes (referred to as filters) for the 2012 filing season, making its automated systems more sensitive to signs of fraud. These filters flag returns that meet certain suspicious criteria so that agents can determine whether they warrant further investigation. Furthermore, the IRS also issues Identity Protection Personal Identification Numbers to victims to protect future filings.

 

Fraudsters exploit the fact that the IRS doesn’t process W-2s and 1099s it gets for taxpayers until after it pays out refunds. Therefore, an ID thief in possession of a name and Social Security number (SSN) can create a fictitious W-2 and apply for a refund using phony income and withholding numbers, or claim credits such as the child tax credit, as long as they are the first to file using that particular SSN.

 

How Do They Steal Your Information? 

Identity thieves employ an array of tactics to steal your personal information. If someone has access to your name, SSN, and birth date, they can probably file your tax return for you and easily pocket the refund by asking the IRS to load it onto a debit card.

 

Some common ways identity theft occurs include:

 

Dumpster diving – Thieves look through trash for discarded gems such as banking information, tax ID information, and other documents that might contain your SSN or provide a way to obtain it.

Shoulder surfing – This happens when someone literally looks over your shoulder as you enter confidential information onto the computer. It can also happen if you say your SSN over the phone, which you should only do in private.

Mail interception – A crook might trail the mailman during the time of year when W-2 wage reports are mailed and simply swipe these confidential documents from mailboxes.  The deadline for these reports is February 28.

Phishing – In a phishing scheme, an individual is tricked into providing passwords, account numbers, SSNs, and other personally identifying data by claiming to be from an actual company the victim does business with. For instance, you might receive an email that appears to be from your bank asking you to update your account information. This site then leads you to a fake site that appears legitimate and requests that you enter your name, birth date, and SSN.

 

In one common scheme, people claiming to be CPAs or tax return preparers take the personal information from an unsuspecting client, file a tax return on the client’s behalf and then embezzle the refund. Other criminals obtain SSNs by bribing office workers with access to confidential information, at places such as apartment rental companies, medical offices, payroll departments, and schools. A U.S. Postal Inspector reported last year that identity thieves were obtaining the SSNs of deceased people and individuals on public assistance.

 

A disturbing trend is the rise of tax ID theft gangs. In one particularly heinous Florida case, a postal worker was gunned down in December 2010 by members of an identity theft ring who stole his master key. This is the key provided to postal workers that gives them access to mail drop-off boxes and apartment mailboxes. The victim was shot twice in the chest by a gang member as part of a plot to steal identities in people’s mail.

 

Needless to say, there are countless ways for thieves to obtain your personal information, and some will stop at nothing to do so.

 

Who Are the Fraudsters Targeting? 

Favorite targets of tax refund identity fraud include the deceased, welfare recipients, the disabled, the incarcerated and military personnel serving in combat zones. And, of course, anyone who can be easily duped into giving up their personal information. In one case, a woman in New York posted Craigslist ads for employment opportunities and apartment rentals that did not exist, and sent applications to everyone who responded. She was able to lure these victims to provide their name, address, and SSNs on the phony applications.

 

However, most people who have their identities stolen for tax purposes aren’t necessarily naïve or careless. There are many instances in which we cannot avoid providing our SSN, and unfortunately this information is not always kept under lock and key.

 

How Can You Avoid Being a Victim? 

While you can’t completely eliminate the possibility of you or your clients falling victim to tax fraud, there are several steps you can take to mitigate the risk, including:

 

File your return as soon as your W-2 is available. Many employers have electronic W-2s available on an online payroll system, so you might even be able to file your return before you receive the hard copy in the mail.

Avoid giving your SSN to anyone unless it is absolutely necessary and you feel confident you can trust them.

Keep your SS card locked in a safe; don’t carry it around in your wallet.

Take care when choosing a tax preparer. Try to get a recommendation from a friend or trusted colleague. Check the preparer’s personal tax identification number, which is required of all paid tax preparers.

Check with your state board of accountancy to ensure that a tax preparer claiming to be a CPA actually has their license and is in good standing.

Be wary of tax preparers who make lofty claims about getting you big refunds.

Remember, if someone else prepares your tax return, you are still responsible for all of the information submitted to the IRS.

 

How Do You Know if Your Information Has Been Compromised? 

The most likely way for you to discover that someone has filed a tax return using your SSN already is if you get a rejection notice from the IRS when you attempt to file an electronic return. You also might learn from your tax preparer or receive a letter from the IRS stating one of the following:

 

You filed more than one tax return

You have a balance due, refund offset or have had collection actions taken against you for a year you did not file

You received wages from an employer you have not worked for

 

If you or one of your clients receives a notice from the IRS, or if you suspect that someone has filed a fraudulent return on your behalf, it is imperative that you respond immediately by submitting the IRS Identity Theft Affidavit, Form 14039.