What Is Tax Identity Theft? And How to Prevent It

No one enjoys filing taxes, but the annual, unavoidable task can become infinitely less fun if you become the victim of tax identity theft. 

What is tax identity theft? Tax identity theft occurs when someone steals your Social Security Number (SSN) and uses it to file a fraudulent return in your name in order to steal your refund (assuming that you’re entitled to one). 

Unlike some other forms of identity theft, it can be hard to take preventative measures to avoid tax identity theft. But there are some things you can do. Here’s what you should know about tax identity theft. 

WHAT ARE THE SIGNS OF TAX IDENTITY THEFT? 

If you’ve been the victim of tax identify theft, the most common ways you’ll find out include: 

• Receiving a notice in the mail from the IRS informing you that it received a suspicious tax return using your SSN. 

• The IRS rejected your e-filed tax return because a duplicate return has already been filed using your SSN. 

If either situation happens to you, or you simply suspect something is amiss, the most important thing you can do is be proactive and work with the IRS to resolve the situation. Here are the steps to take: 

IF YOU HEAR FROM THE IRS 

The IRS will contact you by mail if it receives a suspicious return on your behalf, or if you file a paper return and the agency already has one on file for you. If this happens, respond to the notice immediately and follow the agency’s instructions, which will vary based on your unique tax situation. For example, the IRS may ask you to fill out Letter 4883C or Letter 5071C, which are both used to verify your identity. You may also be asked to fill out Form 14039, which is an identity theft affidavit that documents the incident.  

If tax identity theft has occurred, you will likely have to refile your tax return by paper. Send in all requested forms using certified mail with “return receipt requested” to ensure the documents are received. 

Remember that the IRS only initiates contact with taxpayers by mail. If you receive an out-of-the-blue phone call or email from someone claiming to be from the IRS, do not respond or open the message. 

IF YOUR ELECTRONIC RETURN IS REJECTED 

While it has become very common to file your taxes electronically, if you think your return is being rejected because someone has tried to file in your place, it is your responsibility to get in touch with the IRS.  

Before contacting the IRS, it’s a good idea to verify that you’ve correctly entered your SSN and that someone who can claim you as a dependent hasn’t tried to use your SSN on his or her return. Once you have verified those two things, you’ll need to file a paper return along with Form 14039, which will alert the IRS that you believe you’ve been a victim of tax identity theft. 

WHAT TO EXPECT NEXT 

Once the IRS has been made aware of your case and has concluded its investigation (which can take about four months), the agency will place an identity theft indicator on your account. It may also issue you an Identity Protection (IP) PIN — a six-digit number that serves as an additional security precaution. You’ll need this number to file all returns moving forward, and you’ll receive a new IP PIN every year (typically in December). 

ADDITIONAL STEPS TO TAKE 

Once your identity has been compromised, there’s no telling how far a criminal will go. So after you’ve taken all the necessary steps with the IRS, check in with your state’s tax department to determine if there’s been any suspicious activity regarding your state return. 

In addition, the Federal Trade Commission recommends that you contact Equifax, Experian or TransUnion (the credit bureau you contact is obligated to inform the other two) and ask that a fraud alert be placed on your credit records. It may also be a good idea to freeze your credit, if you haven’t already done so. 

HOW TO PREVENT TAX IDENTITY THEFT 

As the saying goes, the best offense is a good defense. While it’s difficult to stop a thief from filing a false return, there are some steps you can take to make it more difficult for them. 

• File your tax return as soon as possible. Once you do it, a criminal can't file in your name.

• Set your withholding so that you don’t have a big refund coming your way. While that’s generally a smart tax strategy, it also prevents a tax identity thief from claiming it for themselves.

• Create strong passwords and vary them for all of your online accounts. Be judicious about when you share personal information (like your SSN) to make it more difficult for someone to steal it.