How to Avoid Tax Identity Theft and Tax Fraud

tax season is now over for most income-tax payers, but for crafty, clandestine criminals, it’s still a good time to shoot for easy money. As more and more of us file taxes online and our information is sent around the Internet, we are increasingly vulnerable to masters of fraud who can steal our identities and reap the benefits.

In 2012, 1.5 million fraudulent tax returns claiming $5.2 million in refunds were filed, according to a July 2012 report from the Treasury Inspector General for Tax Administration. Additionaly, the IRS detected nearly 940,000 tax returns for the 2011 processing year that contained some aspects of identity theft, up from the 49,000 detected just two years earlier. It’s a new twist on an old con—posing as someone else.

“Identity theft has been around probably for as long as there has been mail,” says John Gethins, manager at the Elmsford office of Jackson Hewitt Tax Service.“People would rummage through people’s trash, steal their names, steal their Social Security numbers. They can then file fraudulent tax returns in other people’s names. I think that everybody’s seen a much bigger increase in identity theft since the start of electronic filing.”

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Technology may have made filing taxes easier, but in some ways it has also simplified the jobs of criminals, as well as their chances of getting away with their crimes. After stealing a person’s name and Social Security number, identity thieves can create bogus W-2 forms and request huge withholdings, yielding big returns.Victims of tax identity theft find out about the fraud when the IRS automatically rejects their filings because their names and Social Security numbers have already been used. The victims then have to “go through a lot of hoops with the IRS” to prove that their identities were stolen, says Stephen Ganns, co-owner of the Jackson Hewitt office. It can take six months for the real taxpayers to finally get their refunds, Gethins says. The IRS tries to prevent taxpayers from being victims a second time by issuing them security PIN numbers that they use on their future tax returns. If someone tries to use those taxpayers’ information again, the lack of a security number will be a red flag and let the IRS know that something is wrong.

Though the government’s numbers on tax fraud are alarming, the practice may not have reached problematic proportions. Ganns says that, even with e-filing proliferating, he has only had one client who was a victim of tax fraud in recent years. Still, the threat is there. Taxpayers, experts say, can help prevent fraud by keeping their passwords on a piece of paper or in their minds, not on their computers. Ganns stresses the importance of creating difficult passwords, such as a sentence that you can easily remember, or even a sentence written backward. In addition, people who file their taxes on their own should do so from secure locations. Your neighbor’s WiFi, for instance, doesn’t “have the encryption that a professional operation would have,” Gethins says. “Make sure you’re not using computers on public sites where there’s no protection. People make the mistake of going into the local Starbucks to do their banking.”

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