How to Avoid Income Tax Identity Theft | A Fast Growing Form Of Identity Theft

income tax identity theftIncome tax identity theft is the latest and fastest growing form of identity theft in the country today. And with income tax filing season upon us, now is an excellent time to not only be concerned with it, but also to begin taking steps to protect ourselves from it.

What is income tax identity theft? It happens when a thief obtains enough of your identity that he or she can file an income tax return in your name for a fat refund. The thief uses your identity, since you are a legitimate taxpayer, but files the return under a different address, and often with bogus income and tax withholding information. The idea, in most cases, is to obtain an oversized refund. The thief gets the refund, but you’re left to deal with the IRS.

In many cases, income tax identity thieves will file tax returns for multiple taxpayers, which can result in tax refunds of several hundred thousands of dollars. The thief simply has the money direct deposited into their own bank account, then closes it out when the refunds are deposited but before the theft is suspected. And they often do this early in the tax reporting season, before the unsuspecting taxpayers file their own returns.

You will won’t discover that this is happened until you’re contacted by the IRS, which will claim a discrepancy in your account. It’s not as difficult to get out from under this form of identity theft as it is for many other kinds. But the whole nasty episode is best avoided entirely, and here’s how you can cut down on the chance of it happening in the first place.

Use a reputable tax preparer

Though it is shocking to realize, income tax identity theft often starts with the tax preparer. Not all income tax preparers are entirely reputable, or they may employ people who aren’t. The best way to avoid this is to use only an income tax preparer who is either well-known, or referred to you by a trusted source.

A preparer with a name like “Joe’s Tax Preparation” could be little more than a front for an income tax identity theft ring. This is particularly true if you don’t know anyone else who has used their service. More important, make sure that anyone who refers them has been working with them for several years. The fact that someone you know went to them last week doesn’t rule out the possibility of theft.

Prepare your own tax return

Of course the best way to avoid income tax identity theft is by preparing your own tax return. With income tax preparation software packages, such as TurboTax, preparing your own income tax return is easier than ever. The advantage of doing the returns your self is that you avoid having your sensitive documents passed through third-party hands entirely. The fewer people who have access to your information, the less chance there is for identity theft.

File early in the season

The typical method for income tax identity thieves is to file income tax returns early in the season. The idea is to beat the actual taxpayer to the punch in filing the return. The thief can file the return and get the refund weeks before the legitimate taxpayer even begins preparing his or her return. It is also helped by the fact that the IRS tends to process refunds faster when the returns are filed earlier.

By filing your tax returns in, say, February, you can often beat a would-be thief to the punch. Your return will be filed ahead of the bogus return filed by the thief, which would cause the IRS to avoid issuing the refund on the fraudulent tax return. It will still represent an identity theft, but the thief won’t get the money he came for.

Safely store tax documents

One of the worst sources of income tax identity theft – and all identity theft for that matter – is closest to home, even with people you know. They are often in a position to come in to possession of your information simply by taking documents left laying around your home.

Make sure any tax documents that you have, or any other personally identifying information, are stored under lock and key. If it isn’t worthy of being retained, then the documents must be shredded. Simply throwing them in the trash opens up the possibility that someone walking down the street could raid your garbage and find  documents which could cost you your identity.

Guard your Social Security number with your life

It is unfortunate, but all an income tax identity thief needs to file a bogus tax return; is your name, address, and Social Security number. For this reason, you must guard your Social Security number with your life. Since your name and address are easy to get – and even a matter of public record – all the thief needs to complete the process is your all-important Social Security number.

Never write your Social Security number down anywhere, and don’t give it out anyone. Especially don’t give it out to anyone on the web or the phone. Any legitimate business that you normally deal with will have it on file and won’t need to request it by phhone or by email. That single number unlocks the key to your financial life.

If you are a victim of income tax identity theft, you can get information on what you should do from the IRS website.

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  1. Wow, Kevin. I had no idea this was going on! Thanks for sharing.

    • Hi Laurie – I’m not surprised, it’s so recent that most people aren’t aware of it. But it’s growing quickly. The thieves are getting more sophisticated all the time, makes you wonder what they could do if they used their time, energy and creativity on constructive pursuits!

  2. Marvin says:

    I saw an entire special on this last year. It’s crazy to know that people can actually get one over on the government and make tons of money doing it. Very scary stuff!

    • Jim says:

      Yep Marvin, although the govt is notoriously lackadaisical with regard to fraud and abuse. When you have so many rules and regulations, even they have a hard time keeping up with them!

    • Hi Marvin – They’re able to pull it off because they prey on unsuspecting taxpayers, and strike before they or the IRS are paying attention to what’s going on.

  3. It’s crazy how bad this scam can get around this time of year. What’s worse is these criminals could have your SS# for months without you knowing about it before they decide to pounce.

    Now as far a filing ASAP I completely agree but this may really only work if you are a W2 employee or a sole proprietor. I run an LLC business and I usually can’t file till about the last week because it takes so much work to get the proper paper work completed.

    • Hi Chris – I’m familiar with your struggle and you’re right, it’s not possible for everyone to file early. This is one of those areas where we’re dealing with risk just as a result of being alive!

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