Don’t Let Identity Thieves Steal Your Tax Refund

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More than a million Americans have their tax refunds stolen by identity thieves every year — and that number is skyrocketing.

National Taxpayer Advocate Nina E. Olson told Congress in a January report that the number of tax-related identity theft cases surged 650% since 2008.

A CNN article last year says tax returns have become a popular target for crime rings who decide drugs are too risky. Whereas refund scams of generations past would involve setting up a physical storefront to rip people off, the rise of the Internet has made it much easier for criminals. Our reliance on electronic communication and transactions — specifically, the popularity of e-filing and prepaid debit cards — make it easy for a criminal to assume someone else’s identity and steal their refund in a way that’s nearly untraceable.

Generally, an identity thief obtains the victim’s information, files a false return in the victim’s name, and has the refund loaded onto a prepaid debit card, after which the crook and the money both vanish.

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Other scam artists pretend to be legitimate tax preparers or companies that help people settle back taxes — usually by setting up virtual “storefronts” on the Web — and then make off with taxpayers’ refunds or personal information.

The IRS calls identity theft and refund fraud a “top priority,” and says it’s devoting more resources to addressing the problem as it grows. As of last September, it was working on 650,000 such cases, according to Olson’s report. It more than doubled the number of staffers working on identity-theft crimes to more than 3,000.

Even so, critics say they are still not keeping up with the surge of thefts. “They are making an attempt to improve the experience of taxpayers who are victims,” Raul Vargas, manager of fraud operations at IDTheft911, told Accounting Today in November. “But the IRS has always been a tax season or two behind the problem.”

Olson’s January report agrees that the agency isn’t doing enough or acting fast enough to resolve cases. ”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,” the report says. “The IRS still takes too long to fully resolve the accounts of victims.”

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Vargas told Accounting Today that, due to understaffing, victims are currently waiting an average of 204 days merely for an acknowledgement from the IRS that it has received a claim — resolving the case takes much longer. This keeps the taxpayer’s status in limbo, leaving him vulnerable to more theft the following year and, potentially, starting the cycle over again. A taxpayer whose identity has been confirmed as stolen by the IRS gets an “identity protection PIN” that flags them as an identity theft victim; but if no PIN has been issued because the investigation drags on, the taxpayer’s identity is still vulnerable.

Before you panic, though, it’s important to keep things in perspective. Although identity theft has topped the FTC’s annual list of consumer complaints for the fifth year running, getting your refund hijacked by cybercrooks is still rare. According to an article in the January issue of Consumer Reports, “Two-thirds of cases of ID theft reported to the annual National Crime Victimization Survey involve stolen credit cards, not stolen identities.”

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Still, vigilance isn’t a bad idea. Here’s how to protect yourself:

  1. The best thing you can do to protect yourself is to file early, experts say. (It might be a little late for that this year, but keep it in mind when you’re tempted to procrastinate next year.) If you get to your refund before the bad guys do, they can’t take it.
  2. Order one of your free annual credit reports from and make sure no one’s tried to open a new account in your name. Odysseas Papadimitriou, CEO of Evolution Finance, says identity thieves buy, sell, and trade stolen identities like baseball cards, so if one crook has your date of birth and Social Security number, it’s possible that another does, too.
  3. Keep an eye on your mail around tax time so you don’t inadvertently throw out an important warning, Papadimitriou adds. If you get a notice from the IRS about a tax return you never filed, or regarding income you never earned, you should get in touch with them.
  4. Delete suspicious emails. The IRS never contacts taxpayers via email or social networks.
  5. Keep your antivirus and malware protection software up to date. Identity monitoring company LifeLock says that if you use online tax preparation software, make sure the URL starts with “https” as opposed to just “http.” (The “s” indicates a secure connection.)
  6. Papadimitriou also suggests ordering a tax return transcript from the IRS to make sure it matches your own records about your income and filing history.
  7. General identity theft-prevention tips also apply here: Don’t share your Social Security number or keep your card in your wallet. And when you’re throwing out old tax documents, shred them first.

Finally, if in spite of your best efforts you’re one of those unlucky million or so Americans who do have their refund swiped before they can claim it, here’s where to go to start getting the mess sorted out.