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How to Avoid IRS Trouble Due to Identity Theft

identity fraud irs

In September 21, 2012, an Arizona woman was sentenced to 3 years in prison for identity theft, and ordered to pay nearly $400,000 in restitution.  She had used stolen identities to file 180 tax returns.   She tried to hide her tracks by filing the tax returns electronically using the unsecured wireless networks of her neighbors.  Then she recruited her friends and had the refunds (in the form of prepaid debit cards) sent to their addresses.

And that, my friends, is the anatomy of an identity theft.

The above example was provided in testimony [1] by an IRS official before the House Oversight and Government Reform Committee.

As you complete your tax returns this tax season, identity theft may be the last thing on your mind — but you should be aware of the potential risks.

It’s bad enough if someone steals your identity or your business’s identity, and racks up charges on your credit cards or takes out loans in your name.  But you could find yourself in a pickle with the IRS, too, potentially incurring unnecessary tax liability. Then you’d have a tax mess to clean up, including  extra expenses to pay an attorney to represent your interests.

You see, income you didn’t earn could be reported to the IRS.  Who’s going to pay the taxes on that income you never received, but the fraudster got?

Or a second (incorrect) tax return could be filed for you and your business.  If you are due a tax refund, it could be delayed or never get to you, because it ends up somewhere else.

And if you and your family receive any Federal benefits, those could be reduced, because another government agency may get information from the IRS suggesting your income went up (when it really didn’t).

The IRS says it has 3,000 employees working on identity theft cases.

It’s easy to hate the IRS, but the agency is required to be a watchdog of taxpayer funds.  If refunds are paid out in error due to fraud, ultimately those are losses the American taxpayer may have to eat.  So if the IRS can cut down on losses from identity theft, it benefits everyone (except the criminals!).

Steps to Take If You Suspect Identity Fraud

Take these steps to protect yourself and your business from identity theft — before or after the fact:

Protect and Avoid

Scrutinize and Report

The IRS offers additional tips here [5].

Fraud [6] Photo via Shutterstock