Tax fraud affects Americans from all walks of life in all corners of the country. While it is not a new phenomenon, has the digital age made it easier to become a victim?
News stories of data breaches seem to be more frequent in today's media. Not only is the frequency increasing but so is the amount of data being compromised.
For the 2016 filing season, the IRS identified over 58,000 fraudulent e-filed tax returns and 2,580 paper tax returns, according to a report released by the Inspector General for Tax Administration. Those numbers have been increasing each year, and are expected to continue given large scale breaches in 2017, such as Equifax (143 million records) and Uber (57 million records) which potentially gave hackers access to information needed to file fraudulent returns.
Chris Moschovitis, founder and CEO of the Information Technology Management Group in New York, says that victims of widespread data breaches should stay on high alert for fraud.
"If you've been a victim of any recent data breach where your personal identification, or [sensitive health care] information was accessed, it's much more possible for hackers to get the data they'd need for identity fraud," Moschovitis said.
Tax-related identity theft, as defined by the IRS, is when someone uses your stolen Social Security number (SSN) to file a tax return - and claiming any potential refund that comes with it. The refund is fraudulent because the taxes aren't being filed by you - and it becomes problematic when you go to file a legitimate tax return and can't because someone has already filed under your Social Security number.
There are several ways you can protect yourself against tax fraud:
1. File your taxes early
This may be the simplest way to protect yourself against tax fraud.
"The first clue for tax identity theft is generally an electronic return filing rejection," says John McCarthy, CPA and founder of virtual tax preparation firm McCarthy Tax Preparation. "Identity thieves will generally file a tax return early in the season in hopes of getting a tax refund before the taxpayer has filed."
If you file before the tax season rush, you're more likely to get in front of anyone who might attempt to use your SSN and a fraudulent W-2 to file, and claim a return in your name.
Of course, filing early also has the added benefits of receiving any refund earlier, and getting the stressful process of filing your taxes out of the way before your tax professional gets busier in March and April.
2. Improve your personal cybersecurity
You don't have to be a tech wizard to improve your personal cybersecurity. Going through simple steps can help to keep your data safe. "Use a password manager and two-factor authentication on as many devices as you can," said Moschovitis. With over 30 years of experience in the cybersecurity and information technology field, Moschovitis believes that it all comes down to your approach. "The key is having a strong cybersecurity environment both at home and at work," he added.
In addition to using a two-factor authentication and a password manager, you can take several other steps to improve your online cybersecurity. Installing a firewall on your computer is an excellent place to start. You can also set your devices to update their software automatically, which helps you to avoid any potential loophole where hackers can access your personal identification data. Using a VPN when accessing the internet can also help to ensure your connection is secure and hacker-free. Finally, exercise caution when giving out your SSN online.
3. Recognize scams
The IRS provides a regularly updated list of common scams that taxpayers may encounter called the "Dirty Dozen." With tax season right around the corner, you may want to consider brushing up on these tax scams as well as researching others. The more information you have on scams that people regularly run into, the less likely you are to fall prey to these tax fraud schemes.
The IRS also puts out regular notices about different phishing scams, and what you should be keeping an eye out for. Most recently, they reviewed a W-2 scam that's been targeting schools, restaurants, hospitals, tribal groups and others.
4. Always ask for a reference number
One common tax fraud scam is to receive a phone call from a bank, credit card company, the IRS or another organization asking you to verify your personal details.
"Don't give [your SSN] out," said Gabriel Kaplan, CPA and senior consultant at Casey Quirk by Deloitte Consulting in New York. "Ask what this is about, and ask for a reference or case number. Then you can call the company back using their official customer service phone number."
This helps you weed out fraudulent calls, and alerts the company in question that a potential scam is being run using their name - putting their customers at risk.
Keep in mind, not all scams are done via phone. If you receive any email communication from the IRS, you should immediately assume you're being scammed.
The IRS doesn't initiate contact any taxpayers via email, and these phishing scams typically prey on people who aren't aware of this. If this type of communication happens, you should report it to the IRS at email@example.com.
While the IRS doesn't contact taxpayers via email, they do contact them via paper mail. If you receive official mail from the IRS, it's likely a notice or letter about payments you owe, a tax refund or a receipt for payments you've made. If it's a notice, the letter will contain specific instructions for you to follow. If you don't agree with the notice, it's important to contact the IRS and speak with a representative right away.
Phone calls from the IRS can happen occasionally, but scammers also call to try and gather your identifying or financial information. The IRS states on their website that they will never demand immediate payment over the phone, demand you use a specific kind of payment (like a prepaid debit card), say you don't have the opportunity to question the amount you owe, or threaten to call the local police if you don't pay immediately. If any of these things are said during your conversation, you're likely speaking to a scam artist, and you need to hang up and report them to the IRS.
Sometimes the IRS will show up to talk to you in person. If they do, the representative you're speaking with will provide two forms of credentials - a pocket commission and a HSPD-12 card. You have the right to ask to see these credentials before speaking with anyone who claims they're from the IRS.
5. Pay attention to IRS notices
The IRS has several filters in place that work to catch tax fraud. If someone files taxes under your SSN, and the IRS flags it, they will send you a notice as soon as they confirm your identity. This notice will typically say that the IRS is monitoring your account. In some cases, these notices will have a unique Identity Protection Personal Identification Number for tax filing purposes. You will need this number to file your taxes - and to avoid having your taxes as being flagged as fraudulent.
6. Don't carry your Social Security card around
Many people feel that carrying their Social Security card is a more convenient and safer way of making sure nothing happens to it. However, this is not the case. Should you lose your purse or wallet where the card is kept, you'll not only lose your credit and debit cards - you'll also be effectively losing your identity.
Instead, consider keeping your Social Security card in a safe, or a locked filing cabinet. Even better, keep a photocopy at home in a filing cabinet or safe, but keep the original in a bank safety deposit box along with other important paperwork. This helps to ensure it's safe - from you losing it, and from a thief getting his hands on it.
7. Monitor your credit
"The best way to protect yourself is through consistent monitoring of your credit so you can take action. Be sure to set up email and text alerts for any changes in your credit score and any account openings," said Kaplan.
"You should also consider a fraud alert. These alerts only last for 90 days, so it's important to follow up when they expire." By setting both a credit freeze and/or a fraud alert around tax filing season, you're making sure that you're always up to date with where and when your SSN is being used.
If you suspect that you're a victim of tax fraud, there are steps you can take. Whether you've received a written notification from the IRS, or you have noticed some suspicious activity on your credit report - you'll need to contact the IRS directly.
It's recommended that you use the IRS phone number provided on the notice they send you. However, if you've contacted the IRS and feel you still have questions, you can also reach them at their Tax Fraud Hotline recording service: 1-800-829-0433. It's important to note that the IRS doesn't accept tax law violation referrals via phone.
The IRS will likely direct you to complete Form 14039 Affidavit of Identity Theft. This form is also useful if you suspect you're a victim of identity theft, as it allows you to indicate that you are a "potential victim." When filling out this form, you'll also need to include a copy of your government-issued ID and a police report (when applicable).
Once your affidavit is filled out, you can mail it to the address listed on page 2 of the form. In most cases, it's beneficial to make several copies of your completed form in case one gets lost, or if you need to fax a copy to confirm.
If you are a victim of a tax scam, and have lost money as a result, you'll need to report the incident to the Treasury Inspector General Admission (TIGTA). To report the incident, TIGTA will have you fill out a form on their website reporting the scam. The form will ask you to summarize the incident - including the date it happened, how much you paid the IRS impersonator, how you paid the IRS impersonator, how they contacted you and whether you provided a second payment.
The form will also ask for your personal information - including your name, address, contact information, date of birth, and it's optional to provide the last four digits of your SSN. You'll also be asked to create a PIN to help you reference your submission later on - you should save this PIN so you can access this report and provide it if any follow-ups are needed.
You will also need to file a complaint with the Federal Trade Commission. The IRS also recommends that you immediately put a fraud alert on your credit using any one of the major three credit reporting institutions (Equifax, Experian and TransUnion).
For many people, tax season can cause a lot of stress. Between getting paperwork organized, going through the filing process and determining whether you owe or will be receiving a refund - it can feel overwhelming. Learning about the prevalence of tax fraud can add to that tax-induced anxiety.
The more you stay up-to-date about current tax fraud scams, and the quicker you are to file and respond if you believe you've been a victim of tax fraud, the more likely you will avoid the problem or will resolve it effectively if you're too late to catch it.
This tax season, stay educated to protect yourself and your family against tax fraud. If you're feeling apprehensive about filing yourself, or if you want additional insight or guidance, reach out to a trusted Certified Public Accountant (CPA) or tax professional who can help you file and answer any additional questions you may have.
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