Tax-related identity theft is a long-standing problem in the United States. This is the way to avoid it.

Tax-related identity theft is a long-standing problem in the United States. In fact, the Criminal Investigation Department of the US Internal Revenue Service reported that it found $2.3 billion in tax fraud in fiscal year 2020, ranging from cybercrime to tax-related identity theft.

Are you a victim of tax identity theft and need help with the financial consequences? Or do you just want to learn how to prevent it from happening to you? Either way, this guide can help.

Tax identity theft occurs when someone uses your Social Security Number (SSN) to submit a tax return. In some cases, thieves do this to apply for fraudulent tax refunds. In other cases, they may use your SSN to get a job. When this happens, their employer will use the SSN to report all income to the IRS. If you do not report the same income on your tax return, the IRS will mark it as suspicious and require you to pay taxes on that additional income. It may even lead to tax audits.

Victims of tax identity theft face severe financial consequences. Not only are they unable to submit their own tax returns (or apply for tax refunds), but other financial loopholes may also be at work. Unauthorized loans, credit cards and other accounts may have been opened using the identity of the victim. 

When tax-related identity theft occurs, victims are usually encouraged to freeze their credit. They may also need to work with creditors and credit reporting agencies to clear the name of any fraudulent activity.

Generally speaking, tax identity theft-and all identity theft, for that matter-occurs after a person's sensitive information is disclosed or falls into the wrong hands. This usually happens due to a security breach or digital data hacking.

Tax identity theft usually occurs in February and early March, because the thief must file a fraudulent tax return before the real taxpayer submits a legal tax return. Fortunately, the IRS has taken steps to reduce identity theft from multiple angles. The agency hired more staff dedicated to preventing fraud, implemented additional protection measures, and changed many of the standards used to submit and authorize returns. 

Despite these efforts, tax identity fraud still occurs from time to time. If this happens, it is important for Americans to prepare every day.

If you become a victim of tax identity theft, you can learn about it in many ways. First, your legal tax return may be rejected. When you submit a tax return electronically, if your SSN has already filed the return, the IRS will reject the return. If you submit a paper declaration form, you will receive a rejection notice in the email to remind you that the declaration form has been submitted.

If a thief uses your SSN to get a job, you may not know the issue until your declaration is submitted and processed. Once the IRS finds that your reported income does not match the income reported by your employer to your SSN, they will send you a letter stating that you did not report income or you owe additional taxes.

It is important to note that all communications from the IRS will be sent by mail. The IRS will not call, text or email you about your tax return or any suspicious activity. Do not use these methods to provide sensitive information to anyone who pretends to be an IRS agent, and report the problem to the Inspector General of the U.S. Department of the Treasury.

If you find that you are a victim of tax identity theft, you need to report to the IRS and the Federal Trade Commission.

If you try to submit electronically and are rejected, you should continue to submit paper returns and pay any taxes you owe by mail. If you need any help during this process, please call 1-800-908-4490 to contact the IRS Identity Protection Professional for help. The agent can guide you through the appropriate steps to report and respond to theft.

The IRS stated that it usually takes 120 days or less to process identity theft cases, but due to the “excusable circumstances” caused by the COVID-19 pandemic, the IRS’s identity theft inventory has increased sharply. It takes an average of 260 days for them to resolve an identity theft case.

This does not even include the time and resources required to resolve other consequences of identity theft (such as unauthorized loans, credit cards, and purchases). Depending on the depth of the theft and the availability of your personal information, the financial consequences usually last for months or even years.

The important thing is to be vigilant. this means:

In some cases, you may need to hire a lawyer—especially if your investments, retirement accounts, mortgages, or other major financial products are affected. They can help you solve the legal problems that creditors, lenders, and financial institutions have in the process.

Many victims of tax identity theft will experience cash flow problems or have to deal with additional debt due to this experience. They may also be unable to obtain traditional loans or credit accounts due to the impact of theft on their credit scores and personal information.

When this happens, the victim has five options:

You can always choose to wait. If the loss is small or you do not rely on refunds to maintain financial stability, you may be able to wait for the IRS to resolve your case.

If you are not yet a victim of tax-related identity theft, you should take action to ensure that you will never be one of them. This means protecting your personal information, shredding sensitive documents and using strong passwords on all online accounts.

You should also submit the declaration form as soon as possible. If your social security number has already been submitted, fraud cannot use your social security number to submit a declaration. Once you have the necessary information, you must file a tax return.

[This article was originally published in Simple Dollar in February 2019. Updated in December 2021. ]

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