When tax season begins, the IRS usually puts out a call to file tax returns as soon as you can. The reason is actually not designed to prevent procrastination that can contribute to a backlog of unprocessed returns on April 15 (although the pressure may help). It’s more to protect your identity and prevent tax refund fraud.
Tax refund fraud happens when someone files your tax return before you do and collects your refund. When you do your taxes, you find out that your return has already been filed and your refund processed.
As if doing your taxes wasn’t stressful enough. Now you have to worry that a fraudster is going to beat you to it?
How common is tax refund fraud?
It sounds unlikely, but it happens. In 2015 alone, the IRS rejected or suspended 4.8 million suspicious returns during processing.
Just last month, a Florida woman was sentenced to more than three years in federal prison for filing fraudulent tax returns. Between 2012 and 2014, she stole identities to file more than 100 fraudulent tax returns, which allowed her to claim more than $580,000 in other people’s refunds (though she was only able to actually get her hands on $128,740 of that refund cash).
The IRS, state tax agencies and tax preparation companies formed a Security Summit in 2015 to crack down on fraudulent tax returns, and since then, there’s been a dramatic reduction in the number of bad refunds that have been issued. But as Andy Phillips, director for The Tax Institute at H&R Block, told me, combating tax refund fraud is still a big challenge, thanks in part to the seemingly endless string of corporate data breaches compromising personal and financial information.
How to keep your tax info safe
The usual commonsense advice for keeping your information safe applies here, including checking your credit report regularly for unusual activity.
Even if you feel like you have your details locked down pretty well, filing your tax return as early as you’re able cuts your risk of getting scammed. “Filing your tax return as early as possible is a way taxpayers can ensure they beat the fraudsters to the punch, even if their information has been exposed in a data breach or in another manner,” Phillips said.
For an extra layer of protection, he recommended getting an IRS IP PIN. It’s a six-digit number assigned by the IRS to verify your identity when you file your tax return, instead of only relying on your Social Security Number as proof of your identity. Once you have a PIN, you’ll use it every time you file a return through tax software or with a tax professional.
It’s not available nationwide yet, but you can obtain one if you filed a federal return last year while a resident of one of these states: Arizona, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Illinois, Maryland, Michigan, Nevada, New Jersey, New Mexico, New York, North Carolina, Pennsylvania, Rhode Island, Texas or Washington.
What to do if someone steals your refund
The IRS warns that any of the following could be signs that your identity has been stolen and used to file a fraudulent return.
You get a letter from the IRS inquiring about a suspicious tax return that you did not file.
You can’t e-file your tax return because of a duplicate Social Security number.
You get a tax transcript in the mail that you did not request.
You get an IRS notice that an online account has been created in your name.
You get an IRS notice that your existing online account has been accessed or disabled when you took no action.
You get an IRS notice that you owe additional tax or refund offset, or that you have had collection actions taken against you for a year you did not file a tax return.
IRS records indicate you received wages or other income from an employer you didn’t work for.
Phillips pointed out two more indicators. First, if you get an email from an online tax preparation company about a new account you didn’t open, you should contact that company immediately. Also, he recommends to check your Social Security Administration earnings statement at least annually. “If there are earnings that do not belong to you, this may be a sign you’ve been victimized,” he said.
If you start getting notices from the IRS or your state, respond immediately to start sorting out the issue, Phillips said. If your return gets rejected because there’s already a return filed in your name, complete Form 14039, the Identity Theft Affidavit. It’s a PDF that you can fill out and print; then you have to actually mail it in to the IRS. You can also skip the affidavit if you want and submit the form electronically during your next step: reporting your identity theft to the Federal Trade Commission.
If you’ve been victim of identity theft resulting in a fraudulent return, you can request a copy of the transcript of of the fraudulent tax return submitted in your name.
Phillips said you should also file a report with your local police department, then place a fraud alert on your credit file.