How Does Tax Identity Theft Occur?

What Is Tax Identity Theft?

Tax identity theft happens when someone uses your personal information to commit tax-related fraud. Commonly, scammers use your identity and Social Security number to file a fraudulent tax return in your name to claim a refund or tax credit. They might also use your information to create an online account with the IRS or request an employer identification number (EIN). If someone uses your identity to secure employment, their income might be reported to the IRS as yours, triggering an inquiry on your tax return.

Tax identity theft is a major problem for the IRS but it's also a big headache for victims. A 2023 report from the Taxpayer Advocate Service, an office within the IRS, found that taxpayers who were victims of identity theft waited an average of almost 19 months for their returns to be processed and refunds issued.

How Does Tax Identity Theft Occur?

Anyone who's struggled to file their own tax return may wonder how or why an identity thief would go to the trouble of filing someone else's taxes. Here's how it typically happens:

1. Identity thieves obtain your personal identifying information through various means such as data breaches, phishing scams or stolen documents.
2. Using your stolen information, the thief files a fake tax return. This may happen early in the tax season, before you have a chance to file a return. Scammers typically fabricate income and deductions to maximize the refund amount.
3. When you attempt to e-file your tax return, the IRS rejects it because their system shows a return has already been filed under your Social Security number.

Signs That Signal Tax Identity Theft

Tax identity theft can go undetected until you try to file your taxes or you receive a notice from the IRS about suspicious activity on your account. More than one type of IRS communication can raise a red flag. The following IRS notices could be signs that your identity has been stolen:

• You can't e-file your tax return because the IRS says there's a duplicate filing.
• The IRS notifies you that a suspicious tax return has been filed in your name.
• You receive a tax transcript in the mail that you didn't request.
• You get an IRS notice that an online account has been created in your name, or that your existing account has been accessed or disabled (without your knowledge).
• You're notified of taxes owed for a year when you didn't file a return.
• IRS records show income from an employer you don't know.
• You've been assigned an employer identification number (EIN) when you didn't request one.

What to Do if You're a Victim of Tax Identity Theft

If you suspect you're a victim of tax identity theft, take the following steps to report the issue to the IRS, notify credit reporting agencies and close any accounts opened in your name.

File and Pay Your Taxes

Even if a duplicate tax return has been filed in your name, you're required to file and pay your taxes on time. You may have to submit a paper return if the IRS e-file system won't accept your return.

Submit an Identity Theft Affidavit

Attach an Identity Theft Affidavit (Form 14039) to your paper tax return, or file Form 14039 online. In response, the IRS will assign your case to the Identity Theft Victim Assistance unit.

If you've been assigned an EIN you did not request, submit Form 14039-B, Business Identity Theft Affidavit or call the IRS at 800-908-4490.

Respond to IRS Notices

If the IRS has sent you a notice about a suspicious tax return, respond as instructed in the letter. The IRS may ask you to verify your identity using an online tool, by telephone or in person at an IRS Taxpayer Assistance Center. The IRS will refrain from processing your return until they receive a response from you.

If you receive a letter from the IRS reporting suspicious activity, you do not need to file Form 14039.

Notify Credit Bureaus

Notify the three main credit bureaus—Experian, TransUnion and Equifax—that your personal information has been breached. You have the right to ask that they place a temporary fraud alert on your credit file, which puts additional security measures in place in case inquiries are made to your account.

Check Your Credit Report

You may also want to check your credit reports from all three credit reporting agencies to look for suspicious activity. You can do this for free at AnnualCreditReport.com. Check for loans and credit card accounts you don't recognize; they may have been opened by identity thieves.

Take Action on Affected Accounts

If you find a suspicious account or loan on your credit report, contact the lender or card company and ask them to close the account. You can file a complaint with the Federal Trade Commission at IdentityTheft.gov to help show that you've been a victim of identity theft.

You may also want to contact your state tax agency to report the issue and find out next steps to secure your state taxes.

How to Protect Yourself From Tax Identity Theft

To protect yourself from tax identity theft, it's critical that you safeguard your tax and personal identifying information when you're preparing your taxes—and when tax season is over. Here are a few tips to follow.

• File your taxes early. You'll shrink the window of time available to fraudsters to file a fake return.
• Use extra security features on your tax preparation app. The IRS notes that many apps now allow you to add a third identifying factor (such as a phone number) to improve login security. Multifactor authentication can also help secure your information.
• Work with a tax advisor you trust. Before you hand over sensitive tax information, check the references and credentials of your tax pro. Also ask about data protection protocols, including encryption for sensitive files, network security, and malware and virus protection.
• Get an IRS identity protection (IP) PIN. Anyone can request an IP PIN, a six-digit PIN you can use when you e-file a tax return. An IP PIN makes it more difficult for scammers to e-file using your account.
• Be alert to phishing scams. Don't give out personal identifying information, especially your Social Security number, over the phone, by email or in response to a text. Don't click on links or scan a QR code in an email from anyone you don't know.
• Follow best practices for securing your data. Protect your accounts and information from scammers: Use a password manager and a unique, strong password for every account. Be careful what you share on social media.
• Shred your documents. This applies especially to copies of your tax returns, tax-related forms and tax worksheets.
• Don't carry your Social Security card. Taking steps to protect your Social Security number will help prevent it from falling into the wrong hands.

The Bottom Line

Detecting and resolving tax identity theft can be a lengthy and complicated process. Worse, the information stolen to commit tax identity theft may also be used to open fraudulent accounts and damage your finances and credit.

One way to help regain your peace of mind is to consider identity theft protection. Experian's premium identity theft protection service offers Social Security number monitoring, monthly web scans, fraud resolution and credit monitoring at all three credit bureaus to keep an eye on your personal data in places you can't see for yourself.