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 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
- Perform a credit check on yourself and your business at least once a year to see if unauthorized loans or credit cards have been taken out.
- Protect your financial information, especially your social security number or EIN number. Don’t give it out over the phone or in an email unless you are absolutely sure there’s a legitimate reason.
- Protect your computers and mobile devices (personal and company-issued) from phishing and malware. Otherwise, your financial information could end up in the wrong hands.
Scrutinize and Report
- Scrutinize every 1099, W-2 or other information filing you receive from third parties. Don’t just file them away or hand them to your tax preparer. Don’t recognize the payer? It could be a sign of fraud. For example, here at Small Business Trends a few years ago, we received a false 1099 — and narrowly avoided another fraud situation . You see, fraud has been dogging affiliate marketing. Fraudsters will set up affiliate accounts (from offshore) under the name of legitimate websites in the U.S., and siphon off the income. The company having the affiliate program reports the income to the IRS under the victim-business’s name. Then you as the website owner get a 1099 reporting income you never received – ugh!
- If you receive a tax form from anyone you don’t recognize, immediately write to the payer, via certified mail. Tell the payer you believe you were a victim of identity fraud and did not receive the income attributed to you. Ask them to investigate and correct their records. Also, consider attaching an explanation to your tax return as to why you did not include the “income” on your return.
- Call the IRS identity theft hotline at 800-908-4490, extension 245. The IRS says it will take steps to “secure your tax account and match your SSN or ITIN.” The IRS has been piloting a program to match taxpayers with their tax ID numbers, to tackle fraud.
- Fill out the IRS Identity Theft Affidavit, Form 14039  (PDF).
- Report the fraud to the FTC’s identity fraud hotline: 877-438-4338
- Report it to local police.
- Report it to the 3 main credit reporting agencies:
- Equifax – 800-525-6285
- Experian – 888-397-3742
- TransUnion – 800-680-7289
- For your business, add to that list Dun and Bradstreet. The iUpdate feature  allows you to update information about your business credit.
- Talk with your attorney and/or tax preparer – before reporting to anyone. They can advise you on what to do and how to communicate so that you are perceived as blameless as possible (how we communicate in legal situations can avoid unnecessary grief later).
The IRS offers additional tips here .
Fraud  Photo via Shutterstock