How To Protect Yourself From Tax Identity Theft
Robert Scott Jack took precautions most people never dream of to prevent tax identity theft.
Mr. Jack, a retired federal cybersecurity expert in Alexandria, Va., who now works as a consultant, shunned online tax-preparation programs that store data on the Internet. He researched the security features of different software programs and opted for a packaged—not downloaded—product. He checked the package for signs of tampering before loading it into his secure home computer.
“I was disappointed and frustrated,” Mr. Jack says. He knew that “sweeping up the broken glass” would take three days of scrambling to lock down financial accounts, plus many more months of waiting for resolution.
In early February, a surge of fraudulent state tax returns forced Intuit , the maker of TurboTax—by far the most popular tax-prep program—to suspend state e-filings for 24 hours.
Since then there have been many reports of fraudulent federal returns linked to TurboTax that also apparently used 2013 information.
Both the Federal Bureau of Investigation and the Internal Revenue Service’s criminal division are probing the issues at TurboTax, according to a person familiar with the matter, and Congress is looking into them as well. A spokeswoman for Intuit says the company isn’t the target of an FBI investigation, and Chief Executive Brad Smith says that the company hasn’t had a data breach.
In addition, people who are potential victims of identity theft—be it from a stolen purse or a data breach—can notify the IRS by filing Form 14039, “Identity Theft Affidavit,” and checking Box 2. The IRS may or may not grant a PIN, but filing the form could qualify taxpayers for other heightened security measures, according to an IRS spokeswoman.
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Mr. Mattson urges everyone who is at risk to file Form 14039. “It only takes a few minutes and could save many hours of your time or a professional’s,” he says.
Shun email links and attachments. Realistic-looking emails can harbor malware that could steal your information—a practice known as phishing. The massive South Carolina data breach, for example, occurred after state tax employees opened links in phishing emails, according to an official report.
The IRS reminds taxpayers that it never initiates contact by email, text messages or social media.
Meanwhile, practice cyber-hygiene—especially in the wake of data breaches such as the massive one at health insurer Anthem, which may have exposed the sensitive personal information of nearly 80 million people, according to the company.
Experts advise using strong passwords and changing them frequently. Update computer applications, especially antivirus software, and make sure that Wi-Fi access is password-protected.
If you prepare your own taxes using a commercial product, make sure your personal information is accurate when you log into the account—especially the bank account number listed for direct deposit of a refund. Inaccurate information could be a telltale sign of a fraudster.
Be careful with paper mail, especially during tax season, when sensitive documents arrive. Guard against theft of such documents and be careful when disposing of them, as thieves can make use of partial information such as a date of birth or bank account number.
Think twice before paying for ID-protection services, experts say. Typically they don’t claim to prevent tax identity theft, which is the most common type of such theft, according to Federal Trade Commission statistics. Most services actually help more with recovery than prevention.
If you are a victim, act fast—and then plan to wait. The IRS has a list of steps for victims to take at www.irs.gov before calling the agency. They include filing a police report, an affidavit with the IRS and a complaint with the Federal Trade Commission; contacting one of the three major credit-reporting companies to place a 90-day fraud alert on your credit records; and closing any fraudulent accounts opened in your name.
Victims may want to impose a credit freeze with the credit-reporting firms, which can prevent extensions of credit using their identity. They should also file their tax returns on paper, the IRS says.
After taking these steps, Mr. Jack contacted the firms holding every financial account he and his wife had, including pension and 401(k) plans. He didn’t close the accounts, but the sponsors did issue fraud alerts and in some cases added an extra layer of security.
Victims say the mad dash to deal with tax identity theft typically takes two to three days, followed by a long wait while the IRS completes its investigation. How long? A spokeswoman for the agency say 120 days is the norm, but Mr. Jack and other recent victims say they have been told to expect resolution in 180 days.
In complex cases, the wait can be longer and the process more frustrating. National Taxpayer Advocate Nina Olson has chided the IRS because taxpayers in such cases don’t have a single contact person within the agency, among other issues. Taxpayers “shouldn’t have to navigate the maze of IRS operations, recounting their experience time and again,” she said.
In response, the IRS says that the current system allows taxpayers to get help when they need it and doesn’t depend on a particular employee’s availability.
Tax refunds aren’t paid until a case is closed, which is one more reason to minimize them by not having too much money withheld from paychecks.
Urge Congress to act. Top lawmakers in both the House and Senate are probing this year’s spate of tax identity thefts, and the Senate Finance Committee is expected to focus on them in a hearing on tax scams in March.
Experts say the fraudulent-filing epidemic is partly of the government’s own making, because easy e-filing and rapid refunds—both priorities in Washington—also offer myriad opportunities to criminals. The IRS often doesn’t get wage data until late spring, long after many tax refunds have been paid, so it is at a disadvantage.
Legislation is required, however, to change key elements of the current system, such as speeding up data delivery or allowing employers to mask a portion of an employee’s Social Security number on a W-2.
The IRS, which has had its budget cut by $1.2 billion over the past five years, recently estimated that $82 million more spent on identity theft prevention could save nearly $1 billion in revenue by 2018.
Keep perspective. Experts say tax identity theft can actually be one of the least harmful types of identity theft. Although the process is painful and slow, taxpayers can work out their problems with the IRS.
Far more difficult, Mr. O’Farrell says, is a rarer type of identity theft in which a criminal commits a violent crime in someone else’s name, say, or has a string of drunken-driving arrests. Then the victim “may have to hire lawyers and go to a state he has never visited to declare to a judge that someone has used his identity,” he says.
Still, tax identity theft is no picnic. Kim Ledbetter, who works at a Toyota dealership in Paris, Texas, received a letter from the IRS on Feb. 5 and then learned that someone had filed both a federal and a Missouri return in his name.
“At first I thought we were being audited,” he says, “but this is much worse.”
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