Identity theft and the IRS, or, Who got my refund?

WASHINGTON Wed Mar 13, 2013 3:51pm EDT

Seized fraudulent tax mailings are displayed during a news conference in Tampa, Florida, in this undated police handout photo. REUTERS/Tampa Police Department/Handout

Seized fraudulent tax mailings are displayed during a news conference in Tampa, Florida, in this undated police handout photo.

Credit: Reuters/Tampa Police Department/Handout

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WASHINGTON (Reuters) - Here is something the nation's criminals are quickly learning: There's no point in getting yourself all dirty with guns and drugs and the sex trade when you can just scam the Internal Revenue Service.

That turns out to be surprisingly easy to do, in this era of high technology and overloaded IRS workers. Tax fraud connected to identity theft has grown exponentially, as bad actors use stolen Social Security numbers to file fake returns and reap undeserved refunds.

The agency has stepped up its prosecutions. In the first four months of fiscal 2013 (October 1, 2012, through January 31, 2013), the IRS opened 542 investigations of possible cases of tax-related identity theft, as compared to 898 for all of fiscal year 2013 and 276 in fiscal year 2011.

The criminal investigations are a drop in the bucket. Some 650,000 unsolved ID theft cases are stuck at the IRS, according to the agency's taxpayer advocate, Nina E. Olsen. It can take from six months to the better part of a year to get a case cleared up for an individual taxpayer.

Now, maybe you've never had a problem with identity theft, haven't had any issues with the IRS and think you have nothing to worry about. But taxpayers like David Parker, a Seattle entrepreneur, would disagree. In mid-2011, Parker learned he was a victim of ID theft when he and his wife tried to refinance a mortgage and discovered that the 2010 tax return they had filed didn't match the one their lender received from the IRS. The IRS had paid out a refund to someone else using Parker's tax ID number months before. The IRS had also cashed the check Parker sent in with his own tax return, even though it had not processed that one.

It took Parker another tax year, countless phone calls, letters and hours of contact with the IRS, and the involvement of Olsen's office before his case was finally resolved - in November of 2012.

"The IRS fails to help hundreds of thousands of identity theft victims," Olsen said in her most recent annual report to Congress, sent in January 2013. The IRS concedes the problem and says it is trying to keep up with the tide of fake returns but lacks the resources.

Can you protect yourself? Only a little bit. Here's what you need to know now.

- File as quickly as you can. The IRS usually pays out refunds without digging too deeply into the identity of the filer, says Raul Vargas, fraud operations manager at IDentity Theft 911, a company that works with people who have had their identities stolen. "It's the subsequent ones that won't go through."

- Never click on an email link about your taxes. First off, the IRS doesn't ever email taxpayers. Secondly, scammers pretend to be mainstream tax preparation companies like H&R Block Inc and Intuit, which publishes TurboTax. If you get an email about your taxes that tells you to visit a website and update information or check your return, just open your browser and type in the web address you know to be legit.

- Take all the usual ID-protection steps. Shred papers that carry key identity information, password-protect and/or encrypt your financial data, and don't be sloppy about receipts.

- If you've already had a problem, be patient and don't count on your refund until you see it. If the IRS rejects your return because it's already received one in your name, you could be in for a long wait. Vargas says his clients who had problems last year had to wait as long as 205 days for the IRS to reconcile and process their returns. Make sure all of your correspondence with the agency is written, and that you keep copies of it.

- File IRS Form 14039, Identity Theft Affidavit, if you've had any problems with ID theft. This will flag your tax return for more careful analysis by the IRS. The bad news is, this will likely hold up your return. The good news? The agency is less likely to send your refund to the criminal now lurking at a mail box near you.

(Linda Stern is a Reuters columnist. The opinions expressed are her own. The Stern Advice column appears weekly, and at additional times as warranted. Linda Stern can be reached at linda.stern@thomsonreuters.com; She tweets at www.twitter.com/lindastern .; Read more of her work at blogs.reuters.com/linda-stern; Editing by Prudence Crowther)

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