Taxpayer ID theft on the rise

Thu Jul 19, 2012 12:48pm EDT

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(The writer is a Reuters columnist. The opinions expressed are her own.)

By Amy Feldman

NEW YORK, July 19 - Call it one more unintended consequence of our complicated income tax system: U.S. taxpayer identity theft is rising, and if your identity is snatched, you can expect a long and tortuous process before you are made whole.

In 2011, some 641,052 taxpayers were affected by identity theft, more than double the 270,518 the previous year, according to Internal Revenue Service statistics cited in a recent report by the Treasury Inspector General for Tax Administration (TIGTA). Nearly 16,000 taxpayers complained of problems related to identity theft to the Taxpayer Advocate in the first half of fiscal 2012, a 57 percent increase over the previous year.

The problem -- which can make taxpayers' lives miserable and costs the U.S. Treasury significantly -- has become so big that Taxpayer Advocate Nina Olson has identified it as one of the biggest problems, while the House Judiciary Committee held a hearing on the topic on July 10.

"Identity theft wreaks havoc on our tax system in many ways," Olson testified. "Victims not only must deal with the aftermath of an emotionally draining crime, but may also have to deal with the IRS for years to untangle the resulting tax account problems. Identity theft also impacts the public ...(Treasury)... as Treasury funds are diverted to pay out improper refunds claimed by opportunistic perpetrators."

What exactly does identity theft mean when it comes to taxes? Well, in one of the more extreme examples, in early July, a former IRS employee was indicted for allegedly using her position to steal taxpayer identities to apply for credit cards. More commonly, thieves steal Social Security numbers and use them to file fraudulent tax returns and snag illegitimate refunds.

Taxpayers sometimes discover that their identities were stolen when they file a tax return and are notified that they already had filed and a refund had been dispersed. Sometimes, the identities come from dead taxpayers, or from senior citizens or others who weren't required to file tax returns.

In one of the more disturbing twists, sometimes the thief turns out to be none other than your own tax preparer, to whom you willingly turned over your financial information.

Return preparers may get people to sign their returns and then alter them, inflating income or deductions without their clients' knowledge and consent and then pocketing the difference between the revised refund amount and what the taxpayer expected to get. This type of fraud is particularly problematic, because the IRS doesn't have a clear procedure for going after preparers -- and going after the taxpayer, who is the victim of the fraud, isn't fair.

Fighting taxpayer identity theft is a bit like going after Nigerian email scammers, a constant battle that seems unlikely to be won anytime soon. But the IRS is trying. In fiscal 2011, the IRS opened 276 criminal investigations for identity theft, and sent 80 swindlers to prison for their frauds.

And a big enforcement sweep in January by the IRS and Justice Department -- which IRS Commissioner Doug Shulman called an "unprecedented effort against identity theft" -- targeted 105 people in 23 states. Meanwhile, in an effort at prevention, the IRS has also set up a program to give taxpayer who have been victims of identity theft special taxpayer-identity protection numbers so they can file future returns without complications.

"Certainly, refund-driven tax fraud is not a problem the IRS can fully solve, but I believe that the IRS can do much more to detect questionable returns and assist victims of identity theft or return preparer fraud," Olson testified at the July 10 hearing.

What can you do to avoid becoming a target? First, beware of "phishing" emails that appear to be from the IRS. The IRS does not contact taxpayers by email asking for personal information, so if you get this kind of email you can assume it is fake. If you do receive one (I often have), ignore it -— or better yet, forward it to the IRS, at phishing@irs.gov.

Second, be careful about giving out your Social Security number. Don't send it over an unsecured site, even for legitimate purposes. And don't carry your Social Security card with you. That way even if your wallet is stolen, your identity is less likely to be.

Third, shred documents containing personal and financial information once you no longer need them. Don't ever simply dump old tax returns in the trash.

Fourth, make sure you trust your tax preparer. In one recent high-profile case, in March, the Illinois Attorney General's office sued Mo' Money Taxes, a tax-prep service and lender based in Memphis, and accused it of filing unauthorized federal income tax returns and charging undisclosed and exorbitant fees. The company did not respond to a request for comment.

If you are the victim of identity theft be prepared for a long slog, as it can take more than a year to resolve an identity theft case. The IRS's guidelines for identity theft are "inconsistent and confusing," according to the TIGTA report, and procedures are dispersed among 38 different Internal Revenue Manual sections.

"The IRS uses little of the data from the identity theft cases to identify any trends, etc., that could be used to detect or prevent future refund fraud," TIGTA reported.

If you suspect that you've been a target, file an identity theft affidavit, Form 14039, available online here . You can also call the IRS's Identity Protection Specialized Unit at (800)908-4490.

(Editing by Linda Stern and Tim Dobbyn)

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