What Is Taxpayer Identity Theft?
Taxpayer identity theft is a specific type of financial crime where an individual's personal identifiable information (PII) is stolen and used by another person to fraudulently file tax returns, typically to claim a refund. This scheme often involves criminals using a stolen Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN) to submit false tax returns before the legitimate taxpayer files their own. The aim is to intercept a tax refund or create false income that then impacts the victim's true tax liability. Taxpayer identity theft falls under the broader category of identity theft, with a direct impact on an individual's tax obligations and financial standing. Victims often discover they have been targeted when their legitimate e-filed return is rejected because one has already been filed in their name, or when they receive an unexpected notice from the IRS.
History and Origin
The concept of taxpayer identity theft emerged as the use of Social Security numbers expanded beyond their initial purpose and as tax filing became increasingly electronic. Originally, the SSN was created in 1936 solely to track individuals' earnings for Social Security benefits. However, its utility as a unique identifier led to its widespread adoption by other government agencies and financial institutions. By 1962, the Internal Revenue Service (IRS) began requiring SSNs for federal tax reporting, formalizing its role in tax administration.21, 22, 23
As the digital age progressed and the volume of electronically filed tax returns grew, so too did the opportunities for identity thieves. Early forms of this fraud involved criminals filing paper returns using stolen PII. With the advent of electronic filing, fraudsters could submit multiple fraudulent returns quickly. The U.S. Government Accountability Office (GAO) has highlighted the persistent challenges faced by the IRS in combating this evolving threat, noting incidents as early as 2010 where hundreds of thousands of identity theft cases affected the tax system.18, 19, 20 The ongoing battle against taxpayer identity theft underscores the need for robust security measures and vigilant taxpayer awareness.
Key Takeaways
- Taxpayer identity theft involves using stolen personal information to fraudulently file tax returns.
- Victims often discover the fraud when their legitimate tax return is rejected or they receive a suspicious IRS notice.
- The Social Security number is a primary target for criminals committing this type of fraud due to its use as a taxpayer identification number.
- Preventative measures include safeguarding personal information and utilizing IRS identity protection programs.
- Recovery from taxpayer identity theft requires specific steps, including filing an affidavit with the IRS and reporting the incident to other agencies like the Federal Trade Commission.
Interpreting Taxpayer Identity Theft
Interpreting taxpayer identity theft primarily involves recognizing the signs that your identity may have been compromised for tax purposes. The most common indicator is receiving a notification from the IRS that your electronically filed tax return has been rejected because a return with your Social Security number has already been filed. Another sign might be an unexpected tax bill or collection notice for income you did not earn, or for a tax year in which you did not file a return.15, 16, 17
If you suspect taxpayer identity theft, it means a criminal has likely obtained sensitive information such as your name, address, date of birth, and Social Security number. This information is then used to impersonate you to the IRS, often with the intent of claiming a fraudulent refund fraud. Recognizing these red flags early is crucial for timely reporting and beginning the recovery process to protect your financial record and clear your name with the tax authorities.
Hypothetical Example
Consider Jane, who attempts to e-file her federal tax returns in March. She uses her preferred tax software, but her submission is immediately rejected. The rejection notice states that a tax return has already been filed for her Social Security number. This is a clear indication that Jane is a victim of taxpayer identity theft.
Upon this discovery, Jane's first step is to visit the IRS website for guidance. She learns she needs to file an Identity Theft Affidavit (Form 14039) with the IRS. Simultaneously, she contacts the Federal Trade Commission (FTC) to file an identity theft report. Jane also checks her credit report for any suspicious activity, such as new accounts opened in her name. While the IRS investigates, Jane must still file her legitimate tax return, typically by mail, attaching the Form 14039. The resolution process can take several months, during which the IRS works to verify her identity and correct her tax account.
Practical Applications
Taxpayer identity theft manifests in several practical scenarios, primarily revolving around tax filing and personal finance security. Individuals encounter this issue when preparing their annual tax returns if a fraudulent return was submitted in their name to claim a refund. It also arises when victims receive unexpected correspondence from the IRS about suspicious activity on their tax account or income that doesn't belong to them.
Businesses can also be affected, particularly small businesses whose Employer Identification Numbers (EINs) or employees' Social Security numbers are compromised, leading to fraudulent W-2 form filings or corporate tax fraud. To combat this, the IRS offers programs like the Identity Protection PIN (IP PIN), a six-digit number known only to the taxpayer and the IRS, which helps prevent fraudsters from filing a return using stolen SSNs.14 For comprehensive steps on prevention and recovery, the Federal Trade Commission (FTC) provides an official government resource where individuals can report identity theft and receive a personalized recovery plan.11, 12, 13
Limitations and Criticisms
Despite efforts by agencies like the IRS to combat taxpayer identity theft, several limitations and criticisms exist regarding its prevention and resolution. One significant challenge is the sheer volume of fraudulent attempts, which can overwhelm existing detection and resolution systems. The investigative arm of Congress, the Government Accountability Office (GAO), has previously criticized the IRS for not fully assessing the risks of business-related refund fraud and for needing to enhance its identity theft strategy.9, 10
Another limitation is the time it takes to resolve a taxpayer identity theft case. Victims often face significant delays in receiving their legitimate tax refunds or in resolving discrepancies on their tax accounts, sometimes extending for several months or even over a year.8 This protracted resolution process can cause considerable financial hardship and distress for affected individuals. Furthermore, while the IRS implements measures like fraud filters and Identity Protection PINs, sophisticated criminals continually adapt their tactics, making it an ongoing challenge to stay ahead of new forms of tax fraud and cybersecurity threats. The reliance on personal identifiable information, particularly the Social Security number, as a primary identifier also presents an inherent vulnerability that criminals exploit through methods like phishing and data breach incidents.
Taxpayer Identity Theft vs. Identity Theft
While often used interchangeably, "taxpayer identity theft" is a specific subset of the broader term "identity theft". Identity theft refers to the unauthorized use of another person's personal identifying information, such as their name, Social Security number, or bank account number, for financial gain or to commit other crimes. This can include opening new credit accounts, making fraudulent purchases, or even committing crimes under the victim's name.
Taxpayer identity theft, however, is narrowly focused on the unauthorized use of a person's information, most commonly their Social Security number, to file a fraudulent tax return or to secure employment that is reported to the IRS, thereby creating a false income history for the victim. The primary intent in taxpayer identity theft is to steal a tax refund or to perpetrate tax evasion or other tax-related schemes. Therefore, while all taxpayer identity theft is identity theft, not all identity theft involves tax-related fraud.
FAQs
How do I know if I'm a victim of taxpayer identity theft?
You might discover you're a victim if your e-filed tax return is rejected because one has already been filed using your Social Security number, or if you receive an unexpected tax transcript, notice, or bill from the IRS for a tax year you know you filed correctly, or for income you did not earn.6, 7
What should I do immediately if I suspect taxpayer identity theft?
If you suspect you're a victim, you should immediately file an Identity Theft Affidavit (IRS Form 14039) with the IRS. It is also critical to report the incident to the Federal Trade Commission (FTC) through their official website, IdentityTheft.gov, which provides a personalized recovery plan.3, 4, 5
How can I protect myself from taxpayer identity theft?
To protect yourself, safeguard your personal identifiable information, especially your Social Security number. Be wary of unsolicited emails, texts, or calls claiming to be from the IRS, as these are common phishing scams. Consider obtaining an Identity Protection PIN (IP PIN) from the IRS, which adds an extra layer of security to your tax account.
Will I still get my tax refund if I'm a victim of taxpayer identity theft?
If you are a confirmed victim of taxpayer identity theft and are owed a refund, the IRS will eventually issue it, but the process can be significantly delayed while they investigate and resolve your case. The IRS aims to resolve these cases, but complex situations can take many months.2
What is an Identity Protection PIN (IP PIN)?
An Identity Protection PIN (IP PIN) is a six-digit number issued by the IRS to eligible taxpayers to help prevent identity thieves from filing fraudulent tax returns in their name. The IP PIN is known only to the taxpayer and the IRS, and it must be entered correctly when filing a federal tax return.1