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Identity Theft: Fraudulent Tax Returns and Methods


Identity Theft: Fraudulent Tax Returns and Methods

Identity theft tax refund fraud is a growing problem that can have serious financial consequences for victims. This type of fraud occurs when criminals steal personal information like names, Social Security numbers, and dates of birth and use it to file fraudulent tax returns and claim refunds.

How Tax Refund Fraud Works

The most common method criminals use is to file tax returns early in the tax season before the legitimate taxpayer files their own return. They make up fake wage and withholding amounts that result in a large refund. By filing early, they are able to get the refund first before the rightful taxpayer even realizes what happened.

The IRS estimates that around $6 billion per year is paid out improperly due to identity theft tax refund fraud. Over 2 million taxpayers are victimized each year. The average refund fraudulently claimed is around $3,000. But some criminals have claimed refunds as high as $50,000 using stolen identities.

Main Methods of Tax Identity Theft

There are a few main ways that criminals obtain the personal information needed to pull off this type of fraud:

  • Data breaches: Massive data breaches have exposed personal information on hundreds of millions of people. These large sets of stolen data are sold on the dark web and used to file fraudulent returns.
  • Phishing scams: Criminals send fake emails or texts posing as the IRS, tax software companies, or employers asking for sensitive personal and financial data. This information can then be used to file false returns.
  • Stolen wallets and mail: Thieves may physically steal wallets, purses, or tax documents from mailboxes that contain Social Security cards, previous year tax returns, or other personal identification documents.
  • Dishonest tax preparers: Some tax prep businesses or individuals have stolen client data and filed returns claiming refunds for themselves.

Impact on Victims

When tax identity theft occurs, victims often don’t realize it until they go to file their legitimate return and it gets rejected because a return has already been filed in their name. Sorting things out with the IRS can be a long, difficult, and stressful process.

Problems victims may encounter include:

  • Delayed tax refunds, sometimes for months or over a year
  • Owing back taxes on fraudulent returns filed in their name
  • Difficulty obtaining loans or credit
  • Long-term damage to credit reports and scores
  • Constant fears over identity safety and risk of further fraud

“I first learned I was an ID theft victim when I tried to e-file my return and got the devastating message that it had already been filed,” said Michelle, an identity theft victim. “It has been a nightmare ever since dealing with the IRS and credit agencies trying to undo the damage” .

Protecting Yourself from Tax Refund Theft

While the IRS has detection methods in place, individuals also need to take steps to protect themselves:

  • File early: File your tax return as early in the tax season as possible, before a criminal can file a false one.
  • IRS Identity Protection PIN: Get an IP PIN from the IRS that must be included on returns to verify identity.
  • Monitor credit reports: Check credit reports regularly for signs of fraud and consider putting a credit freeze on files.
  • Secure personal information: Shred tax documents and statements with personal information instead of just throwing them out.
  • Watch out for scams: Be wary of phishing emails, texts or calls asking for sensitive data like Social Security numbers or financial account information.

Tax identity theft and refund fraud can have severe personal and financial consequences for victims. While the IRS has bolstered fraud detection and prevention defenses, individuals also need to be vigilant in safeguarding their personal data and watching for signs of fraudulent activity. If you suspect you have been victimized, report it immediately and take steps to help resolve issues resulting from the theft.

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