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Tax identity theft is when someone uses your personal information, including your Social Security number (SSN), to file a tax return. Identity thieves often file fraudulent tax returns early in the season and have tax refunds electronically deposited into their accounts. Or, they have the refunds mailed and then steal the checks.
According to the Federal Trade Commission (FTC) Consumer Sentinel Network, which tracks consumers' reports of identity theft and fraud, there were 92,620 reports of employment or tax-related fraud in the first three quarters of 2020. This type of fraud ranked fifth out of the seven fraud types the FTC included in its 2020 analysis. Credit card fraud was the most common type of fraud with 299,500 reports.
If you're a victim of tax identity theft, the IRS may reject your legitimate tax return because it's flagged as a duplicate. Fortunately, you'll still be able to file taxes and receive your refund once you get the situation sorted with the government. Also, there are steps you can take to protect yourself from being defrauded in the first place.
Is Tax Identity Theft Common?
Tax identity theft is generally less common than other types of identity theft and fraud, such as someone stealing and using your credit card account or opening a new credit account using your identity.
Tax identity theft has also decreased in prevalence over the past few years. In part, this is due to a joint effort by the IRS, state tax agencies, private tax preparation companies, tax professionals, payroll processors and financial institutions. Together, they formed a Security Summit in 2015 to fight refund fraud—which is often perpetrated by organized crime syndicates.
From 2015 to 2019, there was an 80% decline (677,000 to 137,000) in the number of taxpayers who filed IRS identity theft affidavits—a form you attach to your tax return if you're the victim of tax identity theft. For context, the IRS processed 155,611,000 returns from individual taxpayers in 2019, as of December 27 of that year.
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In addition to responding to taxpayers who report being victims of identity theft, the IRS actively identifies suspicious returns. It then reaches out to taxpayers to confirm their information before continuing to process the return. In 2019, the IRS says it stopped 443,000 confirmed fraudulent returns (which would have resulted in $1.9 billion in refunds) from being processed.
Employment or tax-related fraud did see an increase in 2020, according to the FTC, but the number of fraud reports remains below 2016 levels. Several other types of fraud also saw increases from 2019 to 2020, with the increase in government benefit fraud especially dramatic.
What Are Some Signs of Tax Fraud?
Commons signs that you may be a victim of tax identity theft include:
- The IRS rejects your e-filed return because your SSN has already been used to file a tax return.
- The IRS sends you a tax transcript. Or, you receive a notice that an online account has been created, accessed or disabled when you didn't take any action.
- The IRS sends you a notice saying you owe taxes, your refund is offset or they're taking collection actions against you because of a tax return from a year when you didn't file.
- Your state unemployment agency sends you a Form 1099-G, but you didn't collect unemployment.
- You receive tax forms, such as a W-2 or 1099, from a company you didn't work with during the year.
- If the IRS suspects your identity has been stolen, the agency may send you a letter asking you to verify your identity and confirm that the tax return they received is correct.
What to Do if You're the Victim of Tax ID Theft
Fortunately, tax identity theft won't lead to losing a tax refund if you're owed one. It can, however, result in delays as you work with the IRS or state tax agencies to resolve the issue.
When you're the victim of tax identity theft, your next steps will depend on how the fraud was noticed.
If you're alerted to the fraud because the IRS sent you a letter, follow the included instructions and call the IRS to confirm your identity. After confirming your identity, you can verify whether you filed the return. It can then be processed or removed from the system, allowing you to file an accurate tax return.
However, if you find out when you try to e-file your tax return and it's rejected due to a tax return already being filed with your SSN, you can file a paper tax return with an attached identity theft affidavit form. The IRS will then assign you to the Identity Theft Victim Assistance organization and work with you to understand your situation and resolve the issue(s).
Other situations may dictate a different response. For instance, when you suspect someone used your information to claim unemployment, reach out to your state unemployment agency and request a corrected Form 1099-G. Even if your state doesn't get back to you before the federal tax filing deadline, you can still file a tax return and don't need to include an identity theft affidavit form.
No matter how you found out about the identity theft, you may want to file an identity theft report with the FTC. The agency will then create a personalized recovery plan based on your situation.
Protect and Monitor Your Identity
In addition to tax ID theft, there are other types of tax-related fraud you should have on your radar. For example, if someone uses your SSN to get a job and their employer reports the income to the IRS, you could receive a notice from the IRS when that income isn't included in your tax filing. Fraudsters may also impersonate an IRS agent, and then either demand payment from you or ask for your personal information.
Thankfully, there are steps you can take to help protect yourself from fraud and make recovery easier if it does happen. Beginning in 2021, the IRS allows anyone to request an Identity Protection PIN (IP PIN). After applying online and passing a rigorous verification process, the IRS will mail you your IP PIN for the year.
You (or your tax preparer) can then add your IP PIN to your electronic or paper tax return. The IRS will automatically reject tax returns that have your information, but don't have the correct IP PIN.
Identity theft could impact more than your taxes as well. You could lock or freeze your credit reports to help keep identity thieves from using your personal information to open new credit accounts. Identity theft protection programs, including Experian IdentityWorksSM Plus, can alert you if your information is compromised and help you quickly respond.