What you need to know about tax identity theft

Tax Identity Theft is a growing problem. The General Accountability Office (GAO) reported that in 2013 the IRS paid out approximately $5.8 billion to thieves. They admit that the real number may be much higher because they are not sure how much theft goes undetected. The GAO is also reporting that they expect the fraudulent losses to continue to climb due to the way that information is received and processed by the IRS. One estimate is as high as $21 billion per year. The losses are staggering and they affect all of us directly or indirectly.

So how is this possible? Many identity thieves are career criminals. They “do their homework” and have learned how to exploit weaknesses in the system.

For example, when a person is employed, the employer will typically withhold taxes they estimate will be owed and send that amount of money to the IRS. At the beginning of the next year, the employer sends a statement (W-2) to the employee and a duplicate copy to the IRS or other taxing authority stating how much the employee was paid in wages and how much tax was sent to the government to cover the estimated taxes owed. When the employee files their tax return, they are oftentimes owed a refund from the government because of deductions, exemptions or credits. This means that the taxes have been overpaid .

One weakness in the system is the timing of the sending of W-2’s by the employer to the taxing authority. Naturally, the employee wants to get their refund back as quickly as possible. The employee files an electronic tax return based on the information on the W-2 provided by their employer. Many times the employer does not provide the duplicate W-2 to the IRS right away. It seems that under present law, an employer must issue a copy of the W-2 to the IRS by the last day of February. The employee will already have a copy for filing purposes to meet the filing deadline, usually April 15th.

In fact, there are other places where earnings may have been paid and the duplicate W-2 issued to the IRS months later. For example, the Social Security Administration can issue these documents to the IRS weeks or months after the tax filing deadline.

In the meantime, the IRS has provided a system through which electronic tax returns can be filed much earlier so taxpayers can get their refunds right away. This year the IRS began accepting electronic filing in late January, long before they would actually receive many duplicate W-2s to cross reference what employers paid in.

Thieves have discovered this weakness in the system and have learned they can file a tax return before the victim does. They simply create phony W-2s and include them with fraudulent tax returns indicating that a large refund is due. Since the IRS does not yet have the legitimate returns and the duplicate W-2s to match up with the legitimate W-2s, it simply issues a refund to a thief who quickly disappears with the stolen funds. Often times the refunds are loaded onto a payment card, like a debit card, and sent to the thief’s address. The victim does not know this event has happened. In one instance, the IRS discovered, after the fact, that they had issued 2000 fraudulent refunds to a post office box in Russia. The victim will usually learn about the fraud when they file a legitimate return and are denied a refund because one was already sent using the victims Social Security number.

Victim’s typically wait 6-8 months to get the refund they are entitled to since the information authentication process is long and tedious.

This is just one example of how tax identity theft is perpetrated. Once a victim, always a victim. Once a victim has this type of theft, they are likely to be a victim again. They may encounter theft in the future such as tax fraud, driver’s license theft, or medical theft. It is vital to have a sophisticated identity theft protection plan that will monitor for fraudulent activity; a plan which is staffed with licensed experts to efficiently navigate us through the emotional and frustrating restoration process.

Part two of this series will cover the warning signs of tax identity theft.

Matthew Rice, a local identity theft expert working with identity theft since 2005,

is available to speak to your church, service club, organization, or business. For further information,

contact him at (661) 822-1127. Email questions or comments to [email protected] .