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If getting your tax refund has been your main incentive to file your taxes early, here is another: it may help you avoid tax-related identity theft.

So, just how big is tax-related identity theft and how does it impact when you should file your taxes? In 2013 alone, the IRS paid out approximately $5.8 billion (yes, with a “b”) to false refunds to identity thieves, according to the General Accountability Office (GAO). That does not include state tax revenue offices that include Ohio, which battled its own tax-related identity theft issues.

The issue

Obviously tax-related identity theft is an issue. It has been compounded, however, because Congress passed a law that requires the IRS to use private collection agencies to locate taxpayers who owe the IRS money. While this may not seem like a big issue, it is. You see, for years, the IRS told taxpayers it does not initiate contact with them by telephone. Prior to the new law, any taxpayer who received a collections call from a so-called IRS agent could pretty safely assume the call was a scam. Now, however, taxpayers will be receiving calls from IRS agents via telephone and those calls will be attempts to collect debt on behalf of the federal government.

This makes it a lot easier for scammers because they can more easily concoct their scams via phone and they have more of an air of credibility given the IRS’s change in collection tactics. This is not only going to cost more money for the federal government to implement, but the IRS must hire these new private tax collectors by March. So get ready, or rather, be alert and vigilant about whom you provide sensitive information to over the phone.

This is not the only new development that will make it easier for scammers to target you for tax-related identity theft. As of January 19, 2016, the IRS began accepting individual tax returns. February 1, 2016, was the date businesses had to have their 2015 W-2s and 1099s issued.

These dates are important because, what typically happens in cases of tax-filing fraud is that the scammer files an income tax return using the victim’s Social Security number with a counterfeit W-2 that indicates a refund is due. When the real taxpayer files, the taxpayer is notified that they are trying to file duplicate returns.

There is a timing problem because while workers receive their W-2s by February 1, 2016, businesses are not required to file their W-2s with the federal government until February 29, 2016, or as late as March 31, 2016, if they file them electronically.

There is also a filing problem because the W-2s do not have to be filed with the IRS on those dates. Rather, businesses have to file them with the Social Security Administration (SSA). The SSA does not send the W-2s to the IRS until July, which means the IRS does not match the true business W-2s with the W-2s filed by taxpayers until months after the IRS has already issued refunds to taxpayers. By then, however, the scammer has already received the fraudulent refund check and the real taxpayer is in an increasingly long battle to get their owed refund while also resolving their income tax identify theft claim, which, on average, takes 278 days.

The first step toward a solution

While the solution certainly seems like an easy one, i.e., have businesses file their W-2s directly with the IRS instead of or concurrently with the SSA, but that is not the law yet. There has been a small step to help protect against this particular type of identify theft, but it is simply not enough. That step is, beginning next tax season, businesses will have to provide their W-2s to the SSA by January 31, starting January 31, 2017. This still requires the SSA to thereafter forward the W-2s to the IRS so they can be matched, and will only moderately decrease the ability for identify theft, but it is a step in the right direction.

Takeaways

Identity theft will continue to be a significant issue for all types of fraud. This includes tax-related fraud on both the federal and state level. While there are some changes going into effect and changes being proposed, they are simply not enough. As such, taxpayers must take matters into their own hands to protect themselves from tax-related identify theft. So remember:

  • The early bird gets the worm – File your taxes early.
  • Be alert – Be cautious when providing sensitive information about yourself or your finances over the phone. If someone claiming to be from the IRS calls you on the telephone prior to March 2016, tell that person to take a hike. If someone claiming to be from the IRS calls you on the telephone after March 2016, conduct due diligence before providing any sensitive information to the alleged IRS agent. It is also quite all right to ask the name of the private agent, check out their credentials, and call the agent back to discuss the issue. An authorized agent should easily be able to tell you the name of the private firm they work for and provide you a call back number that can be reversed white paged back to something other than a mobile phone.
  • Be awake – There are significant issues with the way businesses are required to file W-2s with the SSA as opposed to the IRS directly. Do not be afraid to discuss the need for change on this important issue with your congressmen or legislator. It is all of our issue.
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