Tax Identity Theft Is On The Decline, But You Still Need To Protect Yourself

Identity thieves have many ways to steal your money, but did you know that one of them is filing your tax returns. Thieves file a return in your name as early as possible to beat your legitimate claim, with fake financial data designed to snatch a large refund. A victim won't realize this until their tax return is denied.

As Bankrate.com Chief Financial Analyst Greg McBride points out, "Tax ID fraud is one of those things where somebody can have your Social Security number and they could have been sitting on it for a while, and you would have no idea until they go and file a bogus tax return under your Social Security number. You only find out at the point where your legitimate return gets rejected."

It's a lucrative but simple scheme, and with more stolen identities available via large data breaches over the past few years, tax identity theft attempts have increased dramatically. In 2015, approximately 700,000 taxpayers were affected by identity theft. Meanwhile, the IRS stopped a staggering 1.4 million confirmed fraudulent identity theft returns that year, totaling $8 billion.

To combat the problem, the IRS established the Security Summit Initiative. This agreement between the IRS, state tax agencies, and private-sector entities like tax professional groups and tax preparation software companies increased fraud detection rates and discouraged tax fraud attempts.

According to IRS data obtained by USA Today, the number of tax fraud victims fell to 242,000 in 2017. In 2018, the IRS rooted out 605,000 fraudulent returns, with financial institutions stopping another 82,000 suspect refund requests.

The Security Summit Initiative has been largely successful, but many fraudulent tax return submissions will still be filed in 2019. Will one of them target you?

The first line of defense is to prevent your information from being stolen. Keep computer software and anti-virus protection regularly updated. Use unique and strong passwords for every account and change them frequently. Only use secure connections when transferring personal information.

Store your personal information in as few places as possible, especially your Social Security number. That's the key piece of information that tax identity thieves need. Store your Social Security card in a safe place (Hint: not your wallet), and only give out your number when it's absolutely necessary. Shred any documents that contain personal information before throwing them away.

Establish a mySSA account with the Social Security Administration so you can check your Social Security earnings statement regularly. Errors could be a sign that your Social Security number has been compromised.

Beware of suspicious e-mails that ask for your personal information. Criminals often pretend to be from the IRS demanding payments on things you don't owe. The IRS will never initiate contact with taxpayers by e-mail, text message, social media, or any sort of electronic communication.

Unfortunately, you can't prevent all data breaches. Thieves may already have your information — but you can still take some preventative actions.

Submit your tax return as soon as you have the sufficient information. If your return gets in first, the fake return will be rightfully rejected. "The sooner that you file, the less risk you have that someone has illegally filed ahead of you," advises Betterment Head of Tax Eric Bronnenkant.

Consider putting fraud alerts on all financial accounts and check your credit report regularly for any signs of fraud. If identity thieves have already attacked your credit or bank accounts, they have enough information to file a fraudulent tax return as well.

If you find evidence of fraud elsewhere, even if it hasn't shown up on your taxes yet, notify the IRS immediately by completing IRS Form 14039, Affidavit of Identity Theft. This tips off the IRS to give returns in your name extra scrutiny. Your real return will also receive scrutiny – but that's what you want under the circumstances.

Tax season is painful enough without the added hassle of clearing up fraudulent tax returns and identity theft issues. Take precautions now to reduce the chances of headaches later.

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