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Tax Identity Theft: What It Is and How To Protect Against It

Tax identity theft is when someone uses your personal information to file a fraudulent tax return or secure a job. Learn more.

About nine months ago, I was the victim of major identity theft. Soon after realizing what had happened, I found myself putting out financial fires everywhere, from canceling fraudulent credit cards to closing fake bank accounts that had been opened in my name.

One day, a bank representative asked me a question that I hadn't expected. "Did these scammers steal your tax refund, too?" she asked. The question sent shivers down my spine. Until then, I hadn't considered the possibility that I could be the victim of tax identity theft too.

Thankfully, I was one of the lucky ones in that my tax refund was safe, and I was able to take steps to prevent anyone from using my identity to commit tax fraud in the future. But over 1.5 million taxpayers in 2020 weren't so fortunate.

Below, I explain what tax identity theft is and how to protect against it. We'll also take a look at what you can do if you're an unfortunate victim of tax identity theft.

What is Tax Identity Theft?

Typically, when people talk about tax identity theft, they're referring to the process of someone filing a false return in your name and stealing your refund. This is, sadly, very easy for fraudsters to do if they have your Social Security number.

The way it works is the identity thieves file a return acting like you and do whatever they can to finagle the numbers on the return to maximize the refund you're owed. After a second return is filed by you, the IRS rejects it. Then you're forced to undergo the (often long) process of resolving the issue and receiving the refund that you're owed.

While filing a fraudulent tax return may be the most common, it isn't the only way that criminals can create IRS headaches for you. Tax identity theft could also refer to someone using your Social Security number to get a job making it appear later that you owe taxes on unreported income.

What Are Some Warning Signs of Tax Identity Theft?

Unfortunately, many taxpayers won't know that they've been the victim of tax identity theft until they try to file their returns. According to the IRS, here are a few early signs that someone may be using your identity to commit tax fraud:

  • You received Letter 5071C from the IRS asking you to verify your identity.
  • You're unable to e-file your tax return.
  • You receive a non-requested tax transcript in the mail.
  • You receive an IRS notice of a new online account created in your name.
  • You receive an IRS notice that someone has accessed or deactivated your online account.
  • You receive an unexpected IRS notice saying you owe additional tax or refund offset.
  • You notice that IRS records show wages or non-wage income from an employer you don't recognize.

It should be noted that if you've already discovered identity theft on your credit reports, you're at heightened risk of tax identity theft. If someone was, for example, able to open a credit card account in your name, it's likely that they have all the personal information they need to file a fake tax return too. Use myFICO to monitor your credit reports.

What Should You Do if You're a Tax Identity Theft Victim?

If you've just discovered that someone has fraudulently used your Social Security number or other personal information with the IRS, you'll want to act fast to remedy the situation. In addition to promptly responding to IRS communications, here are a few more steps you could take:

  • Complete an IRS Identity Theft Affidavit: You'll use IRS Form 14039 to report the identity theft to the IRS. After completing the fillable form online, you'll need to print it, attach it to your tax return, and send it to the IRS through the mail.
  • File an Identity Theft Report with the FTC: The form can be submitted electronically at IdentityTheft.gov. In addition to serving as your official statement about the crime, an Identity Theft Report gets you access to a personalized recovery plan from the FTC.
  • Request a copy of the fraudulent return: If you want to know exactly how your information was used on the fake tax return, you can request a copy of it by mailing Form 4506-F, Request for a Copy of a Fraudulent Tax Return to the IRS.

Other identity theft recovery steps to consider include reporting the improper use of your SSN to the Social Security Administration fraud hotline (1-800-269-0271) and placing a fraud alert or credit freeze on your credit files.

Can You Prevent Tax Identity Theft?

You can't totally eliminate all risk for tax identity theft but filing early in the tax season can help reduce your chances of falling victim to tax identity theft. The earlier you file, the less time a criminal has to file a tax return using your personal information.

You can also request an Identity Protection PIN (IP PIN) from the IRS. Once you have this six-digit pin, no one (including yourself) can file a return using your SSN without it. In the past, you could only get an IP PIN if you were a confirmed victim of identity theft. But, beginning in 2021, anyone can voluntarily opt into the program.

To help protect against common forms of identity theft, you can take proactive steps to protect your SSN and check your credit reports regularly. Learn more about how to protect your identity.

Bottom Line

It's never a good time to hear that criminals have received the tax refund that rightfully belonged to you. But it would be a tough blow in 2021, with so many families struggling through the pandemic and needing all the income they can get.

Taking steps to protect your identity today, like safeguarding your SSN and checking your credit reports regularly, can help you avoid tax identity theft. And, if someone has already used your personal information to commit tax fraud, resolve the issue as quickly as possible by following the steps above.

Clint Proctor

Clint Proctor is a freelance writer and founder of WalletWiseGuy.com, where he writes about how students and millennials can win with money. His work has been featured in several major publications including Business Insider, U.S News and World Report, Yahoo Finance, and Forbes.