The Surge in Identity Theft

May 4, 2015

The problem
We live in an electronic age. Personal data is replicated on multiple websites, stored on various software applications and maintained on several mobile devices. So it should not come as a surprise that fraudsters are using this data glut and accessibility to their advantage.

One of the most notable areas of identity theft activity in the past few years has involved tax return filings, and the volume has increased dramatically in the past two years. In fact, the Federal Trade Commission recently reported that tax‐related identity theft was the most common form of identity theft reported in 2014. Tax identity theft is simply someone else using your personal information to fraudulently obtain a tax refund. In its simplest form, the fraudster secures your name and Social Security Number (SSN). They then make up wage and withholding information, ensuring the withholding will create a refund, and file a tax return with the IRS to claim this refund. These criminals aim to file these returns early, before you, the real taxpayer, are able to file your return and report legitimate information. Once the fraudulent return is accepted by the IRS, the return you try to file will be rejected.

There are several indicators that tax identity theft has occurred. The IRS may send a letter stating that more than one tax return was filed using the same SSN, or that your return is being modified to assess additional tax or reduce a refund. You may even receive a notice regarding receipt of wages from an unknown employer.

The cost
Criminals have realized that tax identity theft is a profitable venture. An estimated five million fraudulent refund claims were made for the 2013 year, claiming more than $29 billion in refunds. An estimated 900,000 of these claims were successful, resulting in more than $5 billion in fraudulent refunds being issued.

Unfortunately, if you are the victim of identity theft, a fraudulent tax filing could point to exposure in other areas. With personal information compromised, you may be exposed to a host of other frauds, including unauthorized use of credit cards, theft of bank funds, fraudulent health care coverage or insurance reimbursements and a degraded credit report.

What is the IRS doing?
You might be wondering why the IRS would accept bogus wage and withholding information. After all, employers are required to submit W‐2s to the IRS. The problem is that employers don’t have to remit W‐2s to the government until the end of February, and it then takes the IRS several months to populate their system with the data and match it up to individual taxpayer data. The US Government Accountability Office and the Treasury Department have made recommendations to Congress that would facilitate “pre‐refund matching” to avoid or limit the number of fraudulent refunds, but these recommendations have not yet been implemented.

In the meantime, the IRS has made significant efforts to curb this trend, including:

  • Assigned more than 3,000 employees to deal with ID theft, training thousands more on the means and methods to assist taxpayers, including the creation of an Identify Protection Specialized Unit within the IRS
  • From 2011‐2013 stopped 14.6 million suspicious returns and $50 billion in fraudulent refund claims, using nearly 200 screening filters and assistance from banks to prevent the deposit of invalid refunds
  • Stepped up criminal investigations and prosecutions, and cooperation with local law enforcement
  • Increased the use of identity protection PINs – 770,000 PINs were issued for 2013 tax returns, and 1.5 million have been issued for 2014
  • Creation of identity theft web pages and publications

What can you do?
While the IRS has done a lot to curb efforts to defraud the government, there are a number of things that JPS encourages individuals to do when they discover they have been the victim of identity theft.

Considering how criminals are obtaining confidential information, here are a few techniques for minimizing exposure:

  • Secure personal information, particularly when people you don’t know could have access to it. This includes information in your wallet or purse, at your home when contractors are doing work there or in your car when you are having service done.
  • Protect personal computers and mobile devices by using anti‐spam/virus software and strong passwords that are changed regularly, etc.
  • Don’t give personal information over the phone, through the mail or on the Internet unless you have initiated the contact or you are certain you are dealing with an appropriate authorized person.
  • Check your credit report with the three major credit bureaus (Equifax, Experian and TransUnion) at least annually and any time there has been evidence or suspicion of identity theft.
  • Check your Social Security Administration earnings statement annually.
  • Use an identity theft protection service. There are many companies that offer these services, such as LifeLock and Identity Guard.

Identity thieves will often attempt to initiate communication and gain information from you via telephone. A sense of urgency is generally conveyed in these calls. Claims are made that refunds are being held up, warrants for arrest are about to be issued, or information needs to be immediately verified. The IRS will never initiate communication with taxpayers by phone, text or email. It is possible that the IRS will call a taxpayer, but this should only occur after receipt of written communication via mail delivered by the US Postal Service. If you are unsure, avoid providing any confidential information, obtain the caller’s credentials, hang up and call a known IRS phone number to confirm that the request is valid. Also, if you receive these sorts of communications, we recommend that you speak with your tax professional.

An increase has also been noted in efforts to secure taxpayer information via regular mail. A notice or letter is made to appear like official IRS correspondence and requests certain confidential information, but a closer look will show it to be a fraudulent solicitation.

Victims of identity theft involving tax returns should file a Form 14039, Identity Theft Affidavit, with the IRS. Typically the IRS will also provide instructions verbally or via a notice or letter about steps necessary to ensure their records are corrected.

As efforts to halt identity theft become more advanced, the methods used by identity thieves will become increasingly sophisticated. Any indication that your personal data has been compromised should be met with vigorous action, before thieves can extend the damage to your personal finances and credit. In summary, protect your information, be mindful of activity on your accounts and utilize your tax professional.

Please call our office and speak with one of our tax advisers if you have reason to believe that you are at risk.