File Early to Prevent Identity Theft

Each February, the IRS releases its “dirty dozen” list of tax scams that are expected to plague US taxpayers in the coming year. For the past three filing seasons in a row, identity theft has made the top three (it was number one in 2013 and 2014 and expected to be again for 2016).

Electronic filing of tax returns by all but the lowest volume tax preparers has been required by the IRS for several years. While e-filing does mean more convenience for both taxpayers and preparers and faster refunds for most, it also provides quick opportunities for tax return fraud driven by identity theft. The threat gained widespread attention for the first time in 2015 when Intuit’s TurboTax was forced to shut down for more than 24 hours following reports that the platform had been used to file an unprecedented number of fraudulent returns and claims for refund.

How is this possible?

Many taxpayers are unaware that income information is not immediately accessible to the IRS after W-2 forms are filed by employers. Instead, this information is submitted through the Social Security Administration and doesn’t become available to the IRS for reconciliation until later in the year. This means that a tax filer could claim any amount of income and tax withholding on a timely filed return and the IRS would be unable to determine whether the amounts were correct for some time thereafter.

When the IRS receives a return, the computer checks for mathematical accuracy, mismatches between the names and social security numbers used, and other obvious errors. If none are found and the taxpayer doesn’t owe taxes for the current or previous years, then the return is accepted and a refund processed. When a return is filed by an identity thief, as long as the information checks out and isn’t missing key details, it will probably be accepted. Later, when the true owner of the SSN used to file the fraudulent return files his or her actual return, the IRS will reject it because a return under that SSN has already been filed and accepted. In the meantime, the identity thief has already received “your” refund and disappeared.

Correcting this issue is a major emotional event requiring a taxpayer first to prove that he or she did not file the return in question and then persuading the IRS to accept a corrected return. To make matters worse, until recently, the IRS would not share fraudulent returns with identity theft victims, making it very difficult to determine how much information was compromised.

The best way to head off identity thieves is to file early. Once your legitimate return has been filed and accepted, any additional filings under your SSN will be rejected. Also, be aware that the IRS will never call or email you unsolicited. If you receive a call or email from someone claiming to represent the IRS, beware.

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