For most of us, filing taxes is a painful experience. But for hundreds of thousands of Americans each year, tax time becomes a nightmare, thanks to tax identity theft. The good news is that the number of victims is in decline: Last year, the IRS reported a 40 percent drop of stolen tax identities between 2016 and 2017 filings, due largely to security initiatives put in place by the agency.
The bad news is that there will still be thousands of American taxpayers who discover they are the victim of tax identity theft when they go to file in 2019. Unfortunately, repairing the damage is time-consuming: On average expect it to take up to six months to get your life restored, but depending on the complexity of the identity theft, it can take much longer. The length of the recovery time largely depends on the effort you put into it. Yes, it adds another layer of intense interaction with the IRS and other organizations, but the more legwork you put into the recovery process, the sooner you'll see resolution and your identity restored.
Understanding Where Tax Identity Theft Occurs
Tax identity theft fraud is different from other identity theft, not only because it targets your tax returns, but also because it relies on a limited number of identifiers. Your Social Security number is the most important information to the identity thief because that's your primary government identifier.
Thieves acquire your Social Security number in different ways, including through cyberattacks and data breaches involving current or former employers; stolen W-2, 1099 and other tax forms; your own internet-connected devices via malware or public Wi-Fi hacks; other data breaches that include your Social Security number (including breaches involving government agencies); or even a corrupt tax preparer.
With your Social Security number in hand, the tax identity thief will file a tax return, using as much—or as little—other personal information about you as they want. They'll fudge numbers, usually ensuring they get a large tax return. You don't find out you're a victim until you try to file your own legitimate tax return, and the IRS kicks it back because of a duplicate Social Security number.
If the IRS suspects foul play, however, they will contact you by mail with a Letter 5017C. The letter will ask you to verify your identity. Remember, the IRS only contacts citizens by mail. You can—and should—ignore threatening phone calls saying they are from the IRS, but you should take the arrival of a Letter 5017C very seriously.
Steps to Take if You're a Victim of Tax Identity Theft
If you find out that you are a victim of tax identity theft, you take these two critical actions immediately:
- Contact the IRS Identity Protection Specialized Unit. You'll use the IRS Theft Affidavit Form 14039, which alerts the agency that your identity has been stolen. The form will ask you if this was tax identity theft or another form of identity theft that may or may not impact your tax returns.
- Contact the Federal Trade Commission (FTC). You will fill out a report with the agency that outlines the identity theft. (It will also remind you to fill out the IRS 14039 form.) You may also be asked to include additional information, such as a driver's license, to verify your identity with the government.
Other Steps to Take
Victims of tax identity theft are often also victims of other types of fraud. After you've reported the tax identity theft to the IRS and FTC, take the following steps to ensure your identity is safe elsewhere:
- Take action with your credit report. Request one of the credit bureaus (Experian, TransUnion or Equifax) to attach a fraud alert to your account. Once you do so, they will report the alert to the other two bureaus. You should also make sure there is nothing unusual in your credit report that can be linked to a compromised Social Security number. You may want to request a freeze on your credit report so it is not available to anyone until you release it again. Going forward, check your credit report regularly for any signs of fraud or other problems.
- File a police report about the identity theft. Include copies of the government forms noted above and any other documents related to fraudulent tax returns. Be persistent about a police report filing. Having it on record may be useful as you go through the identity recovery process.
- Contact all necessary government entities. Don't forget that your state and local taxes will probably be affected by the identity theft, so contact each government entity to report the fraud and learn the steps required for resolution in your locality.
- Contact other individual organizations as necessary. Finally, you may discover that the tax identity theft impacts other areas of your life. If there are problems discovered on the credit report, you'll have to contact those individual organizations. You'll want to alert your financial institutions, as well, to protect your monetary assets.
Preventing Tax Identity Theft
While you may not be able to completely prevent tax identity theft, there are some steps you can take to better protect your personal information:
- Keep your Social Security number as private as possible.
- Protect all of your devices with good security software. Always use strong passwords and lock devices when not in use, especially if you store or share sensitive information on those devices.
- Learn how to recognize phishing emails and scam phone calls. No one should ever request your Social Security number or other sensitive information through an email or a call to you.
- Verify everything. If you aren't sure if a phone call or email or even a letter is legitimate, contact the organization directly. Do not click on any links or rely on the phone numbers you are offered; rather, get the information independently.
- File your taxes early so there is a smaller window for fraudsters to take advantage of your personal information.
A few smart actions will make it more difficult for your personal information to get into the hands of identity thieves and, in turn, will ensure that filing tax returns, while possibly unpleasant, doesn't become a nightmare.