Tax Fraud: What You Need to Know

If you’re a victim of tax fraud, you’ve got company. More than 14,000 fraudulent income tax returns were filed in the first two months of the 2017 tax season.

What to do if you’re a tax fraud victim

1. If you file your return electronically and it’s rejected because someone has already used your Social Security number to file a return in the current tax season, here’s what to do:
   • File your taxes on paper
   • When filing, include IRS Form 14039
   
   Be prepared. It can take four months or longer to resolve your case. That’s a long time to wait, particularly if you’re expecting a refund. The IRS website has additional information on what to expect after you file your paper return.
   
   
2. If the IRS sends you a notice or letter saying it has identified a suspicious tax return with your name and Social Security number, here’s what to expect:
   You may receive IRS Letter 4883C asking you to verify your identity
   • Follow the letter’s instructions to verify your identity
   • Don’t complete Form 14039 unless instructed to do so
   • Once the IRS verifies your identity, you tell the IRS whether you filed the return
   
   The speed at which the IRS will handle the case depends, in part, upon the volume of work and case complexity. More information is available on the IRS website.

Steven J. Weil knows the tax fraud problem. He’s president of RMS Accounting in Fort Lauderdale, Florida.

“Tax-related identity theft has been an increasing problem for our clients,” Weil says. “As accountants, we have seen clients with identity theft issues, clients who don’t discover a fraudulent tax return was filed for them until we try to transmit their actual return to the IRS.”

Abuse of Social Security numbers is a big part of the problem. Weil says that because Social Security numbers are exposed every day and used everywhere, including in doctors’ offices, by medical insurance companies, for bank accounts, credit applications, job applications and more, they're exposed to a host of potential tax fraud thieves.

“It has taken our clients as much as two years to get their tax refund after a fraudulent return has been filed with the IRS,” he says.

How big is tax fraud?

The Internal Revenue Service paid out $3.1 billion in fraudulent tax refunds in 2014, according to the U.S. Government Accountability Office. That figure represents only those fraudulent tax refunds the IRS paid out. The GAO says the total attempted refund fraud that year was $25.6 billion.

What is tax fraud?

Tax fraud can be defined in many ways and includes when people submit false information to either reduce the amount of taxes they owe or increase a tax refund. When it involves identity theft, tax fraud is sometimes called tax-related identity theft. It occurs when your personally identifiable information (PII) is used without your permission to commit tax-related crimes or fraud. PII includes such information as your name and Social Security number.

A tax fraud specialist who gains access to your PII can use it to file a tax return in your name, and collect a tax refund—even if you didn’t have a refund coming. It’s a fraudulent return, after all. They’ll make up the numbers, including the refund amount.

The IRS has gotten more aggressive in targeting tax fraud and with good reason. Scammers, posing as IRS employees use emails, text messages, and phone calls to trick unwitting victims. The criminals prompt taxpayers—and even tax professionals—into unknowingly handing over personal information that can be used to commit tax fraud.

“Tax-related identity theft is rampant,” says Abby Eisenkraft, chief executive officer at Choice Tax Solutions Inc., in New York. “Scammers file tax returns, claiming huge refunds, so they rob from the taxpayer and the government. One sure sign of fraud is when you go to legitimately electronically file your tax return, and it's rejected because there's already a tax return on file—the fraudulent one.” 

4 different types of tax fraud

While tax-related identity theft comes in myriad forms, there are four ways it can start, usually involving obtaining a victim’s PII. Here are a handful of ways it can happen:

1. Phishing – Phishing occurs when fraudsters send taxpayers fake emails or website links purported to be from the IRS. The criminals’ aim is to trick would-be victims into sharing personal data. A key point to remember from the IRS itself: “The IRS doesn't initiate contact with taxpayers by email, text messages, or social media channels to request personal or financial information. This includes requests for PIN numbers, passwords or similar access information for credit cards, banks, or other financial accounts.”
   
   
2. Phone fraud – Cyberthieves often impersonate IRS agents via telephone to steal personal information. In recent years, the IRS has reported a rise in such cases. The agency says it will never call to demand immediate payment, nor will the IRS call about taxes you owe without first having mailed you a bill.
   
   
3. Tax preparer fraud – Tax preparer fraud occurs when tax clients receive emails that appear to be from their tax professional asking them to update their online accounts. The emails come from criminals, hoping to trick unsuspecting victims into providing such information as account passwords, Social Security numbers, bank account numbers, and credit card numbers, all of which can make the taxpayer a victim of identity theft.
   
   
4. Phony IRS agents visiting a home – A particularly onerous form of tax fraud occurs when an identity thief visits a home (sometimes targeting an elderly resident) and claims to be an IRS agent. While IRS agents visit homes and businesses, they carry picture IDs and will try to contact you before visiting. Don’t let anyone inside your home unless you’re satisfied they are who they say they are.

Overall, Eisenkraft has a useful message to Americans who one day may have to report tax fraud: You have more prevention options than you might think.

“Always know, the IRS does not call threatening lawsuits, immediate arrest, or jail,” she says. “Additionally, the IRS does not call out of the blue about a tax bill—you’ll always receive notices first, and it won’t be via email.”

The IRS does use private debt collection agencies, but you’d have received a letter from both the IRS and the debt collection company that your case was transferred. “Also, the IRS certainly doesn't ask for payment in Apple iTunes cards or prepaid debit cards,” Eisenkraft says.

Other tips—from the IRS—to help protect yourself and your tax information:

• Always use security software with firewall and anti-virus protections. Make sure the security software is always turned on and can automatically update. Encrypt sensitive files such as tax records you store on your computer. Use strong passwords.
• Learn to recognize and avoid phishing emails, threatening calls, and texts from thieves posing as legitimate organizations, such as your bank, credit card company, and even the IRS. Do not click on links or download attachments from unknown or suspicious emails.
• Protect your personal data. Don’t routinely carry your Social Security card, and make sure your tax records are secure. Treat your PII like you do your cash; don’t leave it lying around.

The IRS offers a helpful web site on the subject of tax fraud. You can also call the IRS’s Identity Protection Specialized Unit at 800-908-4490.