Tax Identity Theft: Real-World Examples and Protection Strategies You Need to Know

Introduction: Growing Threat of Tax Identity Theft

Tax season causes so much anxiety to many Americans, but there is a growing fear- tax identity theft. FBI reports recorded a 26% increase in complaints on identity thefts related to tax returns last year, with conservative figures placing the cost to taxpayers at around $5.2 billion per annum. As a finance professional who has been advising clients on tax security since 2019, I have certainly seen firsthand how damaging this crime can be to unsuspecting victims.

Tax identity theft happens when criminals use your information, mostly your Social Security number, to either file fraudulent tax returns or claim benefits that don't belong to them. What makes this particular type of identity theft scary is that often the victim has no idea what has happened until they try to file their own legitimate return.

Let's take a poor road down memory lane through some authentic examples that can help you understand the workings of this fraud and protect yourself.

Cheating Means of Tax Identity Theft

Method #1: The Early Filing Fraud

This is the most common manner of tax identity theft commonly encountered in my practice. Here's exactly how it would work.--

While most employers distribute the W-2 forms by late January, the majority of taxpayers hold out until closer to the April deadline for filing. Taking advantage of this gap, early filing can be done by criminals using stolen identities. They tweak the numbers on the return to create a refund that is sent to accounts whereto they have control. When, later on, you try to file the return, the IRS rejects it on the premise that, according to their records, you have already filed.

Real-World Example: Another client of mine-an Illinois-based healthcare professional-had his civil information compromised in a breach in his medical facility. Data on him was sold in an underground forum, and a thief filed a return in February for a massive refund under contrived specifies of income and deductions. The refund was paid out to a prepaid debit card. When the client tried filing his legitimate return in April, the IRS rejected it. It took nearly 8 months to settle and pay his real refund.

Method #2: Phishing Attacks Leading to Tax Fraud

Phishing attacks continue to be the top avenue through which criminals elicit your personal information to commit tax fraud.

Real-World Example: In the aftermath of last tax season, these sophisticated emails had been plaguing so many of my clients, complete with the IRS crest. Said to be entitled to additional refunds but needing to be vetted in three days' time via the provided link, acting upon such a insisted request could imperil one's finances. The link purportedly took one to the site where the roguish act could be committed-first blackmailing information from the victim. With such information given away willingly, the perpetrators file for fraudulent tax returns.

Method #3: Child Identity Theft

It is such a horrible crime to steal the identity of children in order to fraudulently claim them as dependents on tax returns. Children make targets for identity thieves because there is no credit report on their records and the information is not actively monitored.

Real-World Example: A family I advised in 2023 witnessed their mail going missing, including documents containing their child's Social Security number. Using that SSN, an identity thief fraudulently claimed the child as a dependent on their tax return, drawing tax credits for which they were not entitled to. The parents only learned about the fraud when they filed their return and received an IRS notice addressing the double dependent claim.

Method #4: Employer Data Breaches

These days, companies that maintain personnel information are a prime target for data thieves who want to commit tax fraud.

Real-World Example: By the year 2024, I had consulted for a mid-size company that underwent an attack by means of a CEO/HR phishing scam. A criminal impersonated the CEO through an email to HR requesting that they send all employee W-2 information. The HR, convinced that the request was genuine, sent the information that contained employees' names, addresses, Social Security numbers, and salary details. Within a few weeks, several employees found out that fraudulent returns had been filed with their information.

Warning Signs You're a Victim of Tax Identity Theft

Depending on my experience assisting clients in recovering from tax identity theft, these are the principal warning signs you should be on the lookout for:

• The IRS rejects your electronically filed income tax return on the grounds that a return has already been filed using your SSN
• You receive a letter from the IRS Taxpayer Protection Program (such as Letter 5071C, 4883C, or 5747C) on a suspicious return
• You receive IRS notices concerning tax returns that you never filed
• You are told more than one tax return has been filed using your SSN
• You receive tax transcripts you did not request
• IRS records show you were paid wages from an employer for whom you never worked
• You are notified about duplicate dependent claims in multiple returns

How to Protect Yourself with Expert Advice

1. Acquire an Identity Protection PIN System

This is actually the most effective tool I recommend to my clients. The IRS issues an Identity Protection PIN (IP PIN) to taxpayers to avert misuse of their Social Security number on fraudulent federal income tax returns. The PIN changes annually, and taxpayers must use it when filing any federal tax return. The enrollment starts with the person setting up an online account at IRS.gov.

2. When Children Apply for Credit, Check for It in Their Names

Parents should check periodically for children's credit reports. If a report pops up for a minor who absolutely has not put in any application for credit, this can signal identity theft. In such cases, I would strongly advise that a Security Freeze be put on the children's credit report to prevent other parties from accessing it.

3. Be the First to File

Filing early is probably the biggest factor I've noticed enabling the things I've seen my clients succeed in when it comes to scam prevention.

4. Guard Your Personal Data

To better secure yourself:

• Keep physical documents that contain SSN, or other personal information away from unauthorized persons
• Try to be cautious when giving your information online
• Good habit: Use unique password(s) on all your accounts
• Never use public Wi-Fi when doing bank transactions
• Be highly suspicious when approached unexpectedly by anybody who claims to be from the IRS

What to Do If You're a Victim

The moments to react should be prompt if you consider or confirm that you might just be a victim of this kind of identity theft:

1. If any true notice is received, answer immediately by calling the IRS at the number in the notice
2. Report so the IRS through the local IRS Stakeholder Liaison
3. File a complaint with the Internet Crime Complaint Center of the FBI
4. Contact the local police for filing a report on the data breach
5. Probably set a fraud alert or do a credit freeze on your credit reports
6. File your tax returns, even if you have to do it by paper.

Conclusion: Stay Vigilant to Protect Your Tax Identity

Tax identity theft remains a huge threat from American taxpayers, with evildoers constantly modifying their working plans. Hence, by studying how a tax identity theft may happen and learning the signs to watch for, plus applying some means of protection, you'll have a much better chance of defending yourself from becoming a victim.

Remember, the IRS will never initiate contact with taxpayers by way of emails, texts, or any form of social media. Treat any electronic contact that shows up out of nowhere claiming to be from the IRS with extreme caution.

As yet another tax season beckons, I appeal to all my readers to put these protections into place. Such peace of mind is indeed priceless.

Do you have experiences of tax identity theft or protective measures taken? Share testimonies in the comments below.

Tax Identity Theft-Related FAQs

Q: Tax identity theft cases: How long to resolve? A: Resolution times vary greatly depending on the case. Typically, taxpayers are asked to wait at least 120 days, while particularly complex cases may take 6 to 12 months to fully conclude.

Q: Could tax identity theft affect my credit score? A: Pure tax identity theft does not normally affect your credit score. However, it is possible that a thief who has enough information to file a fraudulent tax return can attempt other identity theft avenues that would negatively affect your credit.

Q: Will the rightful tax charge still be paid out in tax identity theft cases? A: Yes, your tax refund will eventually be paid out eventually but will be delayed as IRS attempts to investigate and resolve the matter of identity theft.

Q: How do I find out if someone has already submitted a return under my information? A: Obtaining a tax transcript from the IRS, or creating an online account at IRS.gov helps you check your tax records for any unexpected activity.

Q: Should I file a tax return if I learn I am a victim of tax identity theft? A: Yes. File for your legitimate tax return no matter what, even if filing by paper, and if you're an established victim, attach Form 14039, Identity Theft Affidavit, to your return.

About the Author

The article is penned by Nitesh Miller, a financial expert and founder of Fundaura. He has more than 6 years of giving personal and corporate advice on tax security matters and financial protection. Having worked with various top finance executives, he ensures that every piece of advice here is sound, well researched, and practical. There is no fluff here-just applicable finance knowledge for you!