The Impact of Identity Theft on Your Tax Return

With the April 18th tax deadline fast-approaching it is time to turn our attention to personal tax returns. One topic that is becoming increasingly problematic is the prevalence of identity theft, and the manner in which fraudulent tax returns can impact the victims. Although issues surrounding identity theft can typically be resolved (as they relate to the filing of the tax return), the resolution can take months, and the impact of the ordeal can be felt for years afterwards. 

• Why are fraudulent tax returns filed? When a criminal steals a taxpayer’s identity, and files a false tax return in the name of this taxpayer, the criminal is typically seeking a fraudulent refund.  The U.S. Government Accountability Office estimated that in 2013 the Internal Revenue Service (IRS) prevented or recovered $24.2 Billion of fraudulent tax refunds, while it paid out $5.8 Billion of fraudulent refunds.

• How will I know if I am impacted? The most common way in which a taxpayer determines that his/her identity has been used to file a fraudulent tax return is through the rejection of an e-filed return.  The IRS will not accept two tax returns with the same social security number in a single year. Therefore, if a criminal has already filed a tax return using a taxpayer’s social security number, then that taxpayer’s legitimate tax return will be rejected when it is e-filed. Alternatively, the IRS may notify the taxpayer that it believes his/her identity may have been stolen.

• What do I do if my return is rejected? If a legitimate tax return is rejected because the social security number has already been used to file a return, then the taxpayer must mail the tax return prior to the deadline. In addition, either the taxpayer or his/her accountant should contact the IRS to move forward with a resolution. One element of this resolution will be the creation of an IRS Identity Protection PIN (IP PIN) for the taxpayer. This six-digit code is changed annually, and allows the taxpayer to e-file tax returns in subsequent years.

Identity theft is a complex topic, and in some instances can be very difficult to resolve.  While the above information relates to the most common circumstances, other problems can also arise, and additional steps are available to address these problems. If you have any questions about the impact of identity theft on your tax return, or the best way in which to handle such a circumstance, contact your accountant for more information.