Tax Identity Theft: How It Occurs and How to Protect Yourself

Stephanie Faris
Writer
Dolores Bernal
Editor
January 29, 2024
tax form

Credit: Nataliya Vaitkevich

Last summer, a Pennsylvania college student received a letter in the mail from the IRS. Had she filed a tax return?

The answer was no, but to set the record straight she had to agree to a video call with an IIRS agent. Once that was done, she thought the drama was over, but it had just begun.

On March 15 of this year, the student received another IRS letter. Once again, another tax return had been filed in her name and a refund was on the way to the filer.

The student had to get in touch with the IRS. This time, she had to wait 40 minutes to tell someone that this other return was fraudulent. Finally, the return was flagged and the IRS promised to look into it.

Unfortunately, the issue had an inconvenient side effect – she was dependent on her parent’s tax return. Due to the repeated fraudulent returns, though, her parents could no longer file electronically. They had to file a paper return.

The college student and her parents aren’t alone. Every year, taxpayers learn their Social Security numbers have been used to file fraudulent taxes

It’s important to be aware of tax identity theft so that you can take measures to prevent it, so let’s dive in.

What Is Tax Identity Theft?

We’ve all heard of identity theft. 

Someone uses our personal information for fraud. Maybe they apply for credit or open a new bank account. The result is a possible ding to our credit and a bunch of angry creditors.

With tax identity theft, your identity is used to file taxes in your name. Why would someone want to file taxes? To grab your refund.

Obviously, they don’t go after self-employed people. Most of the time, we owe money. But that’s a different issue.

Fraudsters are after some of the 237.8 million in refunds the IRS issues each year. If a scammer can snag someone’s Social Security number, the goal is to rush to file it before that person does. The refund is redirected to the thief’s bank account, and the victim suddenly can’t file a tax return.

How Does Someone Get Your Tax Information?

Your Social Security number is KEY to tax fraud. If the scammer can get your Social Security number and your contact information, it’s even easier.

How does someone get your Social Security number? Here are a few of the most likely ways.

1. Physical Assets

When was the last time you saw your Social Security number on a piece of paper? Maybe it was the Social Security card that was originally issued in your name. It could be on a loan application or a tax record.

If that paperwork stays locked away, accessed only by you, it’s all good. But someday you might throw something away with that number on it.

The biggest risk probably comes from outside your home. Your Social Security number could be on paperwork you don’t even know exists. If those files end up in the hands of someone who has bad intentions, you could find yourself a victim of tax identity theft. Or, other types of identity theft.

2. Digital Theft

Hackers seem to grow more sophisticated with each passing year. If your Social Security number exists online somewhere (in the dark web, for example), it can be snatched by a determined criminal.

Fortunately, businesses and organizations are getting better about only storing the last four digits. But you might not know how your information is stored at the time you provide it.

3. Scam Calls and Messages

You don’t need lost paperwork to have your Social Security number stolen. In some cases, you’re the one who hands it out.

Here’s how it works:

You receive a phone call. The person at the other end gives some reason for needing your identification. Maybe there’s a supposed issue with your taxes or bank account. You provide the information and hang up, not realizing you just spoke to a scammer.

The same scam can work through email or text messages. In this case, you click on a link and land on a very realistic-looking website that wants you to enter some information. This is what’s known as a phishing scam.

4. Previous Tax Filings

Every year, you provide a wealth of information to the IRS. If you e-file, all of this information could be vulnerable to a hacking attempt. If you print it out, that paperwork could be lost along the way.

If you pay someone to do your taxes, do you know where it resides after it’s been filed? It could be intercepted from there, as well.

Your tax paperwork not only has your Social Security number but also your contact information and valuable facts and figures that can be used to create a believable fake tax filing. It also likely tells a scammer just how much of a refund you got last year.

Signs Your Identity Has Been Compromised

tax forms

Credit: Nataliya Vaitkevich

Identity theft is a relatively quiet crime. You usually won’t know it happened until long after a criminal has taken action.

The same goes for tax identity theft. 

Someone could grab your Social Security number today and not even use it for years. It might circulate on the dark web for a while before someone decides to use it. But the first time you typically know tax fraud has been committed is through your mailbox.

That’s the good news about tax identity theft. The IRS almost exclusively communicates by postal mail. If you’re like me, your mailbox is pretty empty these days while your email inboxes are full of junk. That means I’m unlikely to miss one of those scary-looking IRS envelopes.

Here are some telltale signs someone has used your Social Security number with the IRS.

1. IRS Notice of Account Creation

The IRS likes to verify new accounts. That’s how the agency catches some fraud cases.

There’s even a form for it. It’s the IRS. Of course, there’s a form!

A CP301 notice is designed to confirm that you’ve registered for a new online service. There will be a phone number on the notice. If you didn’t register for anything with the IRS, call the number and ask them to deactivate the account.

2. IRS Notice About Tax Returns

I know when I’ve filed a tax return. I don’t expect to hear from the IRS again unless I’m getting a refund. As I mentioned above, I usually owe.

So, a letter in the mail from the IRS can be alarming.

Once, I received a bill, stating I missed one of my quarterly estimated tax payments. That was fun to try to get sorted out. 

Earlier this year, I received a letter stating that there had been an adjustment in what I reported and what the IRS had. They showed in two columns the “difference.” There was no difference.

Other than that, I’ve never heard from the IRS (knock on wood).

But believe me, those letters can be scary. If we receive one, we usually want to get it sorted out as soon as possible, especially since many IRS audits are just letters requesting more information.

But there’s a chance that a scary letter is a scam.

It could be that someone faked the letterhead and is after your Social Security number or money. In that case, it’s important to reach out to the IRS.

But a strange IRS letter could also be a sign someone has filed a return using your number. In fact, this is how many tax identity theft instances come to light.

Scrutinize every communication you get from the IRS, and if you have questions, contact them.

3. New EIN Notification

If you run a business or you freelance, like me, an employer identification number is a great safeguard.

Why? As a business, you’ll be asked to provide your Social Security number for tax purposes before starting work with someone new. I’ve worked with dozens of clients in recent years, and sometimes I’m not sure who’s on the other end of that W-9.

I landed an Employer Identification Number (EIN) in just minutes, all from the comfort of my home office. I can now use that EIN whenever my Social Security number is needed for business-related purposes. The Social Security Administration and IRS know that EIN goes with my SSN. Nobody else does.

But the ease of getting an EIN can work against us. Using your Social Security number, someone can grab an EIN and use it to commit fraud

You’ll know about this when the letter arrives, confirming your new EIN. If this happens, first make sure nobody has requested the EIN on your behalf. If you’re sure it was a fraud, you’ll need to file Form 14039-B: Business Identity Theft Affidavit.

4. E-File Rejection

I remember the days before e-file. We had to track down the current year’s tax forms, fill them out, then mail them in before the deadline.

Today, e-file isn’t just easier. It’s the norm. In 2023, 93.8 percent of individual forms were filed electronically.

Like EIN applications, e-filings have made it easier for scammers to work the system. If someone steals your Social Security number and files a return before you do, you may find out when you try to e-file. If the e-file software sees a return has already been filed, you’ll be blocked from filing what the system sees as a duplicate.

If someone has used your Social Security number to file a return, you’ll need to complete Form 14039: Identity Theft Affidavit.

How to Prevent Tax Identity Theft?

Whether you’ve had your identity stolen or you’re just concerned about it, the best thing you can do is protect yourself from it happening in the future.

Here are some measures you can take to protect yourself as a taxpayer.

1. Safeguard Your Social

To steal your tax identity, scammers first need your tax identification number. That’s your Social Security number, and you should take measures to keep it safe.

As much as possible, reduce who has the number. You’ll probably need to provide it for medical care, employment, and credit, but otherwise, it shouldn’t be used as an identifier. When someone claims to need it, ask if an alternative is available. You may be able to get away with providing only the last four digits.

Take measures in your own home to keep that number safe. Don’t carry your Social Security card around with you and lock up any paperwork containing the number.

2. Request an Identity Protection PIN

The IRS has a measure taxpayers can take to protect themselves. It’s called an identity protection PIN.

The good news? You can request the PIN in just minutes on the IRS website. You simply click here and follow the prompts. You’ll need to snap a selfie and share a photo of your government-issued ID.

The bad news? You’ll have to go through this process once a year. The system is shut off from mid-November to mid-January, but you can do it any other time.

3. File Early

Someone else can’t file your tax return if you get there first. As soon as you have all your income documentation, set aside time to do your taxes. 

There are a couple of other benefits to filing early:

  • If you’re due a refund, you’ll get it early. 
  • If you use a tax preparer, you’ll be ahead of the rush. 

If, like me, you owe the IRS each year, you don’t have to pay the balance due until the tax deadline, even if you file early.

4. Choose Tax Preparation Services Carefully

I love using a tax preparer. It makes life so easy.

I hand over my tax forms and a spreadsheet that outlines my business income and expenses, and he takes it from there.

I don’t have to give him my Social Security number. He has all that.

We put a lot of trust in those professionals, though. Even if they’re trustworthy, are we sure they’re keeping our information on a secure server? If there are any print documents, are they tucked away from prying eyes?

The same goes for any tax preparation software you use. It should be encrypted as it travels from your computer to the IRS’s servers. You should also make sure any documents on your computer are encrypted. Otherwise, if you’re hacked after you’ve filed, all that information could be exposed.

5. Secure Your Connection

Your electronic devices are jam-packed with information on you. 

And that information can be used to steal your tax identity, among other things.

It’s important to keep your devices secure. Use strong passwords for your apps, and password-protect any files that have your Social Security number. If someone hacks your computer, it will be safe.

Another way to keep your devices safe is with a good antivirus. Malware protection will cover you if you accidentally download a virus that can gather information on your device. Norton, McAfee, and AVG are all solid solutions that can help.

6. Consider Identity Theft Protection

If your Social Security number is in someone else’s hands, you could have a bigger problem.

Using those numbers, someone could apply for loans, make purchases, and even rent an apartment. If that happens, your credit score might take a hit.

Identity theft protection could offer just the peace of mind you need as you move forward.

Companies like Aura, LifeLock, and Identity Guard won’t just pay for the costs to repair things if your identity is stolen. They’ll also monitor your credit and alert you to suspicious activity. Staying on top of things means you can take quick action if someone does try to use your identity.

What to Do When Your Identity Is Stolen?

form 1040

Credit: Nataliya Vaitkevich

Once you’re sure your identity has been used for tax purposes, it’s time to take action. By hopping on things quickly, you may be able to reduce further damage. 

Here are some steps to take:  

1. Contact the IRS

I know, I know. Calling the IRS sounds about as much fun as a dental cleaning. I feel you on that one.

But one phone call to the IRS can clear up any questions you have. A representative can take a look at your account and let you know if any communication you received was legit.

If you received a letter in the mail, it should have contact information on it. Make sure the number you’re calling is a legitimate IRS number. Remember, scammers fake IRS letterhead in the hopes of getting you to hand over some money or your Social Security number. 

The list of phone numbers is available here. If there isn’t a number, use that list of numbers to find the phone number you need.

2. Request a Copy of Any Returns

Did someone file a tax return using your Social Security number? If so, you have every right to see that tax return. It’s your Social Security number, after all.

There’s a form for that, too.

The IRS loves its forms!

The form you’ll need to request your doppelgänger’s tax return is Form 4506-F, Request for a Copy of a Fraudulent Tax Return.

You can mail or fax that form, too. Keep a copy for your records. It can take up to 90 days to get a response. You should receive confirmation that they’ve received your request within 30 days.

3. Report the Incident

The Federal Trade Commission wants to know about identity fraud, and that includes tax-related identity fraud. 

To make it as easy as possible, there’s one site to report fraud. Simply go to IdentityTheft.gov and follow the prompts.

This report lets the FTC know about the incident. It’ll also complete an IRS Identity Theft affidavit on your behalf, so you won’t have to deal with mailing the paperwork.

Best of all, the report gives you a personal recovery plan. This includes a list of steps to follow to clean everything up after an identity theft incident.

4. Other Protective Measures

If your Social Security number is in the wrong hands, your tax return may be the least of your problems.

The trouble can start with using your Social to apply for jobs.

Employers use a system called E-Verify. This looks up a person’s Social Security number to determine whether the potential employee is authorized to work. 

If your Social is used for this, you’ll be on record as earning money, which, as mentioned above, could get you flagged for an audit. The IRS won’t like that your reported income doesn’t match what employers say you earned.

You can protect your Social Security number by signing up for E-Verify’s Self-Lock feature. This lock will last for only a year, but you’ll be notified to extend it 30 days before it expires.

Then there’s your credit.

Using your Social, a scammer can commit all kinds of fraud. But in order to do that, the person will rely on approval from the credit bureaus.

You can stop that.

If you don’t plan to use your credit anytime soon, you can set up a freeze with each of the three credit bureaus. You’ll do that here:

Once frozen, requests for new credit will be denied. This won’t stop your existing bills from going through, and you can easily unfreeze and refreeze them at any time.

Lastly, you may want to contact your bank and credit card issuers to let them know. Simply explain that your Social Security number has been used by someone who wasn’t you, and ask that a note be put on your account. Moving forward, watch your accounts and credit score for a while to make sure nothing strange comes through.

✎ Related: How to Lock Your Social Security Number? ⟶

5. Know What to Expect Next

After you’ve reported the tax identity theft to the IRS, representatives will investigate and take action as needed. On your end, you may not hear anything until the matter is resolved. Even then, you might not get the details you crave.

Since you’ve been a victim, you may be assigned an IP PIN to use when you file your taxes next year. Make sure you allow extra time with your tax filings from the previous year. There could be delays due to a flag on your account.

6. Monitor Your Tax Notifications

If your Social Security number has been used for IRS activities, there’s a possibility it’s been used for employment-related activities

Someone might have used it on a job application, for instance. That means your Social Security number will be registered as having earned income during the tax year. The problem is, you won’t have reported that income.

That can trigger one of those dreaded audit letters. It might not make much sense to you, but knowing the reason for it could help. Instead of trying to track down the reason for the letter, you’ll know it’s likely related to tax identity theft.

Conclusion

Any form of identity theft can be frustrating, but if it’s isolated to your tax identity, at least you’ll only have to deal with the IRS.

That’s why it’s important to detect tax identity theft as soon as possible. Then you can take action to make sure they don’t hit your credit or bank account.

Still, having to get everything sorted out before you can enjoy your tax refund is beyond frustrating. With a little patience and the right (you guessed it!) forms, you’ll be able to get everything sorted out in no time.