How to Handle Identity Theft at Tax Time

There are plenty of resources available to tell us what to do if we are a victim of identity theft. However, none (that I've seen, at least) address the implications of identity theft at tax time for the victim. Identity theft can affect the victim in a number of ways, and can be caused for different reasons.

In my experience, the main form of tax-related identity theft is what I call "buying children". No, I don't mean literally, but there is an entire "black market" of people buying and selling children's social security numbers for tax purposes only. Usually, it's a child's social security number that is being bought and sold, enabling the purchaser to qualify for benefits that they otherwise wouldn't be able to take (earned income, child tax credit, higher exemptions and deductions, lower tax rate), however it can also be older and/or mentally disabled dependents as well. This usually comes from non-working parents or guardians letting friends, family, or even strangers claim their children for a portion of the refund. However, it can also happen when someone goes to a sketchy tax preparer promising an extremely low price to prepare their tax return. The next year, that person has problems filing themselves or their dependents because the sketchy preparer has sold their information to the highest bidder. This may also end up being a problem for the child once the child reaches working age and wants to file their own tax return, they're being claimed by someone else so they cannot claim themselves which will result in them paying more money in tax than they may have to.

Another common source of identity theft is people using the SSN of a citizen to get a job because they aren't a citizen or are in some other way inable to get a job using their own SSN. This causes a huge problem at tax time when the employer or other payor sends wage and income information to the IRS in the stolen/purchased SSN. That income does not belong to the identity theft victim, however the IRS will assess tax, penalties, and interest on that income to the victim. In most cases, the fraudster does not file a tax return. If they do, however, file a return first, the victim has even more issues to work out with the IRS. This form of identity theft is more catastrophic than the first because this form will affect every aspect of the victim's life, whereas the "child buying" usually only affects the tax returns.

Below you will find out how identity theft affects your tax return, the steps to alert the IRS to potential or actual identity theft, and some some tips to prevent identity theft.

HOW IT AFFECTS YOU:

If someone uses your social security number to file a tax return in your name, the IRS will NOT issue you a refund without an investigation during the year of offense and for a few years afterward. If this happens, you will not be able to file an electronic return (if a return had already been filed in your name) and the investigation may take AT LEAST 12-16 weeks, if not longer. In the years after the initial claim of identity theft, the IRS may hold your tax refund for at least 8-12 weeks to make sure there are no other claims before releasing it, even if you file electronically.


WHAT TO DO IF YOU'RE A VICTIM:

If you believe you are a victim of identity theft and it is currently affecting or may potentially affect your tax returns, ALERT THE IRS IMMEDIATELY! If you have received correspondence from the IRS, immediately reply to the name, address, and/or number on the notice. If you haven't received correspondence but know that your tax records may be affected, mail or fax an Identity Theft Affidavit (Form 14039, found on the IRS website) along with a copy of proof of identity (driver's license, passport, etc). The IRS has various publications on their website about identity theft and you can find the list here.

If you believe you are a victim of identity theft and it is affecting other accounts than your tax records, follow these steps to report the fraud.

TIPS TO PREVENT IDENTITY THEFT:

Identity thieves can get your personal information any number of ways, so always make sure you guard your sensitive information.

-Be careful of your tax preparer! The IRS has great tips on choosing your tax preparer. You can find those tips here.
-Don't carry your social security card (or other documents with your social on them) on your person unless you will need it (ie, starting a new job).
-Shred all mail that contains sensitive information before throwing in the trash.
-Only share this sensitive information with Internet sites you trust.
-Never send your information over e-mail or text message without encryption.
-Do NOT give your information out over the phone.
-Be careful of phishing e-mails (reputable companies will never ask for your personal information through e-mail).