What Is Tax Identity Theft?

This form of identity theft occurs when criminals steal your personal information, like your Social Security number or tax ID, and file a false tax return in your name, hoping to claim your refund. These fraudsters typically file early in the tax season, before you have a chance to submit your own return.

This form of identity theft can happen when your information is stolen from hospitals, nursing homes, or other vulnerable databases. The rise of electronic tax filings and automated IRS systems makes it easier for criminals to exploit personal data and steal refunds.

If your personal information is stolen, you may face significant delays in receiving your legitimate refund or could even be held liable for taxes you didn’t owe.

How Can Tax Identity Theft Occur

Criminals use a variety of tactics to steal personal information and file fraudulent tax returns in someone else’s name, often claiming the tax refund meant for the victim. These fraudsters are becoming increasingly sophisticated in their methods, targeting individuals through various channels to gain access to sensitive data. Understanding how these crimes occur is the first step in protecting yourself.

Common tactics used in tax refund scams include:

• Impersonating Bank Representatives: Criminals may pose as bank employees and contact individuals, asking for sensitive banking details, such as account numbers or PINs, often under the guise of verifying or updating personal information.
• Pretending to Be Insurance Agents or Corporate Agencies: Fraudsters often masquerade as legitimate insurance agents or representatives from corporations to gain access to your personal data. They might claim they need this information for verification or to offer you new services, only to steal your identity in the process.
• Employee Misuse of Access: Sometimes, employees at various businesses or organizations may have access to sensitive data and misuse it for personal gain. These internal breaches are often harder to detect but can lead to significant financial loss and damage.
• Credit Card Fraud: Fraudsters might steal credit card details to make unauthorized purchases or open new accounts under your name, making it easier for them to gather the data they need to file fraudulent tax returns.
• Dumpster Diving: This may sound old-fashioned, but criminals still often resort to rummaging through trash, recycling bins, or dumpsters in search of discarded financial statements, tax documents, or any paperwork containing personal information they can use to commit fraud.

Furthermore, criminals primarily prey on the following information:

• Bank account numbers
• Tax ID numbers
• Business statements
• Company credit card numbers

Signs That I Have Been Affected by a Tax Refund Scam?

The sooner you recognize the signs of tax refund fraud, the faster you can take action to minimize the damage. Identity theft can escalate quickly, and the longer it goes unresolved, the more complicated it can become. Two main red flags that you might be a victim of a tax refund scam include IRS notices and account issues. 

The IRS generally only contacts taxpayers if there is a problem with their return or if they owe money. If you receive any of the following, it’s a strong indication that your information may have been stolen:

• A letter from the IRS about a tax return you didn’t file. This is a major red flag that someone has used your identity to file a fraudulent return.
• A tax transcript or document that you did not request. If the IRS sends you forms or documents that you haven’t requested, someone may be using your details to access your account.
• A notice stating that you owe more taxes or that collection actions are being taken. 

Also, the IRS will never ask for personal information through email, text, or social media. If you notice any of the following signs, someone may have used your information to file a tax return or create an IRS account:

• An email notifying you that a new account has been created in your name. This means criminals have used your personal details to set up an online account, potentially to file a false tax return.
• A notice that your online IRS account has been disabled or accessed without your permission. If your account is locked or shows unfamiliar activity, it’s likely that someone else has tried to gain access to your tax records.
• A message telling you that you can’t e-file your tax return because one has already been filed using your Social Security number. 

How to Prevent Tax Refund Fraud

To protect yourself against identity theft and tax refund fraud, you should follow careful internet practices, which should include:

• Creating unique passwords for each online bank and email account
• Use trusted websites
• Use updated antivirus programs
• Limiting personal information on social media
• Keep track of financial accounts

How To Report Tax Return Fraud

If you believe that you are the target of tax refund fraud, you must move quickly to limit the damage and take the following steps:

• ​​If you haven’t received an IRS notification of fraud, contact their Identity Protection Specialized Unit for guidance on securing your tax account.
• Respond promptly if you receive 5071C or 6331C letters from the IRS asking to verify your identity.
• Complete IRS Form 14039 (Identity Theft Affidavit) to report the fraud and begin the recovery process. 
• Report the fraud to your local police department for an official record and to help dispute fraudulent claims.
• Place a fraud alert on your file by contacting one of the three major credit bureaus (Equifax, Experian, or TransUnion) to place a fraud alert on your file.
• Contact your bank and other financial institutions to put alerts or freezes on your accounts to prevent further misuse of your information.
• File a Complaint with the FTC.
• Connect with a tax identity theft attorney to learn more about how they can help you resolve your identity theft issue efficiently and correctly. A Martindale-Nolo study found that 90% of people who worked with a lawyer walked away with a settlement, compared to only about 50% of those who handled their case without legal representation.

Why Are Fraud Cases Important?

Financial fraud and tax refund fraud incidents often result from no fault of the impacted party, yet the victim suffers from serious financial losses. Such losses can have devastating financial consequences on individuals and families if not properly compensated. Tort law allows those individuals to seek just legal recourse through data theft lawsuits.