It seems like on a daily basis, I wake up to hear yet another major security breach of personal information has occurred for a major retailer such as Target or Home Depot. If you are like me, my household has received three or four letters this year sharing that an organization we have done business with is reporting a possible or known breach. I dutifully review my credit card and bank accounts for fraudulent charges; I watch my credit report for suspicious activity. However, it isn’t just my good credit or even access to my bank account that many of these thieves want.
No, they want to file a tax return on my behalf! In the world of fraud, this activity is much more lucrative and lower risk for thieves than most other forms of identity theft. Consider that the Federal Trade Commission reports that in 2013 43% of identity theft complaints dealt with fraudulent tax returns. This compared to only 15 percent in 2010!
Just last month a national news program reported on this growing problem and interviewed one convicted fraudster who collected millions by filing roughly 15 returns a day. The IRS estimates that in 2013 it issued refunds on three million fraudulent returns at a cost to taxpayers of $5.2 billion.
Our firm alone has assisted three clients who have been victims of this crime. Two of the victims were recently deceased. In one of these cases, it is suspected that the information was gathered from a death certificate submitted to a cell phone provider in order to close the account. An office worker allegedly sold this personal information to the thief.
How does the criminal get away with this, and how does it impact you? Generally, he files a very simple tax return for the stolen identity reporting wages, federal withholding and possibly a tax credit or two resulting in a refund of $3,000 or $4,000. The IRS is required to issue refunds within six weeks; however, with the advent of e-filing and electronic deposit, refunds generally are issued within 10 days or less. The IRS processes the return and either denies or accepts it. If accepted, the refund is generally posted to a debit card provided by the filer. It is reported that this scheme works 40% of the time. Not bad odds for a criminal whose biggest risk is that he won’t receive the refund.
So how does this impact you, the legitimate tax payer, and what can you do to minimize this risk? First of all, the impact to you can range from a significant delay in your tax refund to a lengthy process of proving you are the legitimate taxpayer to the IRS. This of course impacts your tax account and causes delays in obtaining credit or other transactions where tax transcripts are checked or required.
What can you do to minimize the risk of this type of identity theft? First, of course, follow the IRS tips to protect yourself:
- Don’t carry your Social Security card or any documents that include your Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN).
- Don’t give a business your SSN or ITIN just because they ask. Give it only when required.
- Protect your financial information.
- Check your credit report every quarter.
- Secure personal information in your home.
- Protect your personal computers by using firewalls and anti-spam/virus software, updating security patches and changing passwords for Internet accounts.
- Don’t give personal information over the phone, through the mail or on the Internet unless you have initiated the contact or you are sure you know who you are dealing with. (The IRS does not communicate by e-mail and usually does not call you directly.)
Additionally, if you have had personal information lost or stolen such as financial documents, a purse, or a wallet that contain identifying information, contact us or the IRS Identity Protection Specialized Unit directly to report that you may be at risk. This could prevent many months of frustration later on.
Finally, one of the most effective ways to prevent the headache from this type of fraud is to file your tax return early! The return that the IRS receives first will dictate the complexity and direction of resolving this matter. If you file first, the second return will be rejected. The criminal will not follow up on the rejected return. Beware, these thieves are motivated and timely – they are only successful if they file before you do! Think of it as a race. The first one to the IRS wins!
Most tax forms are available online in mid-January. Send us all of your documents as soon as they are available. We will prepare and e-file your return as soon as the IRS opens the filing system for 2014. If you have a refund, you will receive your refund sooner! If you have a balance due, the payment is still not due until April 15th and can be scheduled for automatic withdrawal on that date. If you are waiting for K-1’s or have a business, send us your personal information in January so we can prepare the return and hold it for the final information.
If you are a business owner, begin finalizing 2014 now! As we enter the fourth quarter, be certain that your records are reconciled and current through September 30th. This will allow us time to prepare your business tax return and related K-1’s early in the season, which then allows you to file your individual tax return sooner.
We are here to help you. Call your Alerding CPA Group tax professional at 317-569-4181 to discuss what you need to do to file early this year. Alerding CPA Group is an Indianapolis-based public accounting firm. Visit our website: www.alerdingcpagroup.com.