Identity Theft Tax Fraud: Protecting Yourself from Stolen Identity Refund Fraud

Identity theft tax fraud occurs when criminals use stolen Social Security numbers and personal information to file fraudulent tax returns and claim refunds in victims' names. These schemes can involve millions of dollars and hundreds of victims, but the IRS has established procedures to protect innocent taxpayers from erroneous tax bills and collection actions.

What is Identity Theft Tax Fraud?

Identity theft tax fraud, also known as stolen identity refund fraud (SIRF), happens when criminals obtain someone's Social Security number, date of birth, and other personal information, then use that information to file a fraudulent tax return claiming a refund. The criminal typically files early in the tax season, before the legitimate taxpayer files, and directs the refund to a prepaid debit card or bank account they control.

The scale of these schemes can be massive. In 2023, federal authorities uncovered a scheme seeking over $100 million in fraudulent refunds using stolen identities. These operations often involve organized crime rings that obtain Social Security numbers through data breaches, phishing schemes, or purchasing stolen information on the dark web.

How Identity Theft Tax Fraud Works

Criminals use several methods to perpetrate identity theft tax fraud:

Stolen Personal Information

Identity thieves obtain Social Security numbers through various means:

• Data breaches at companies, healthcare providers, or government agencies
• Phishing emails that trick victims into providing personal information
• Purchasing stolen information on dark web marketplaces
• Stealing mail containing tax documents or W-2 forms
• Insider access at companies or tax preparation firms

Filing Fraudulent Returns

Once criminals have the necessary information, they:

1. File tax returns early in the tax season (January through early March)
2. Claim false dependents or inflated deductions to maximize refunds
3. Direct refunds to prepaid debit cards or bank accounts they control
4. Use the refunds before the legitimate taxpayer discovers the fraud

Common Red Flags

You may be a victim of identity theft tax fraud if:

• You receive a tax transcript or notice from the IRS about a return you didn't file
• You receive a refund you didn't request or expect
• You receive a notice that someone already filed using your Social Security number
• You receive a notice about wages from an employer you don't recognize
• The IRS rejects your legitimate return because one was already filed under your Social Security number

What Happens to Victims

The IRS has established clear procedures to protect innocent victims of identity theft tax fraud. Understanding these protections is crucial for anyone who discovers they've been victimized.

IRS Halts Collections Upon Verification

When the IRS identifies that a taxpayer may be a victim of identity theft, it halts all collection actions until the matter is resolved. This means:

• No wage garnishments
• No bank levies
• No property seizures
• No liens filed (or existing liens are released)
• No collection notices sent

The IRS will not pursue collection against a verified identity theft victim for taxes owed on fraudulent returns filed in their name.

No Criminal Prosecution of Victims

Victims of identity theft tax fraud are not prosecuted for crimes committed using their stolen identity. The IRS and Department of Justice focus their criminal investigations on the perpetrators, not the victims. This is true even if:

• The fraudulent return was filed using the victim's Social Security number
• The victim's name appears on fraudulent returns
• The victim receives erroneous tax bills or notices

Verification Process

To verify identity theft, the IRS typically requires:

1. Form 14039, Identity Theft Affidavit: This form documents the identity theft and provides the IRS with necessary information to resolve the case.
2. Proof of Identity: A copy of a government-issued photo ID (driver's license, passport, etc.)
3. Supporting Documentation: Any relevant documents showing the fraud, such as notices from the IRS, police reports, or credit monitoring alerts

Once the IRS verifies the identity theft, it will:

• Mark the account with an identity theft indicator
• Remove fraudulent returns from the victim's account
• Correct any erroneous tax assessments
• Issue a special Identity Protection Personal Identification Number (IP PIN) for future returns

Common Identity Theft Scenarios

Misidentification as Relatives

In some cases, identity thieves use stolen Social Security numbers to claim dependents on fraudulent returns. This can cause confusion when the IRS matches information, leading to situations where:

• A person is incorrectly identified as a relative or dependent on someone else's return
• The legitimate taxpayer's return is rejected because their Social Security number was already used as a dependent
• The IRS sends notices questioning dependency claims

These situations are resolved through the identity theft verification process, and victims are not held responsible for fraudulent dependency claims.

Spanish Name Misunderstandings

Identity theft cases sometimes involve complications with Spanish names, particularly when:

• Names contain multiple surnames (following Hispanic naming conventions)
• The IRS system matches names incorrectly due to surname order
• Criminals exploit name variations to file multiple fraudulent returns

The IRS has improved its systems to handle Spanish names correctly, but victims should be aware that name-related issues can complicate identity theft cases. Working with the IRS Identity Theft Victim Assistance unit helps resolve these issues.

Multiple Fraudulent Returns

Sophisticated identity theft rings may file multiple fraudulent returns using the same stolen Social Security number, attempting to:

• File returns in different states
• Use slight variations of the victim's name
• Claim different filing statuses or dependents

The IRS's identity theft detection systems flag these patterns, but victims may receive multiple notices before the fraud is fully resolved.

Protecting Yourself from Identity Theft Tax Fraud

While you cannot completely prevent identity theft, you can take steps to reduce your risk and detect fraud early:

File Early

File your tax return as early as possible in the tax season. Identity thieves typically file fraudulent returns in January and February, so filing early reduces the chance that a criminal will file first using your Social Security number.

Secure Your Personal Information

• Shred documents containing your Social Security number before discarding
• Use secure mailboxes or post office boxes for tax documents
• Be cautious about providing your Social Security number online or over the phone
• Monitor your credit reports regularly for suspicious activity

Use an IP PIN

If you've been a victim of identity theft, the IRS will issue you an Identity Protection Personal Identification Number (IP PIN). This six-digit number must be included on your tax return each year. Anyone can request an IP PIN through the IRS website, even if they haven't been a victim of identity theft.

Monitor Your IRS Account

Create an account on IRS.gov to:

• View your tax transcripts
• Check your account balance
• See if any returns have been filed under your Social Security number
• Receive electronic notices instead of paper mail

Be Wary of Phishing Scams

The IRS will never:

• Call you demanding immediate payment
• Threaten to have you arrested
• Request payment via gift cards, wire transfers, or cryptocurrency
• Email you asking for personal information

If you receive suspicious communications claiming to be from the IRS, report them to phishing@irs.gov.

What to Do If You're a Victim

If you discover you're a victim of identity theft tax fraud, take these steps immediately:

1. File Form 14039

Complete and submit IRS Form 14039, Identity Theft Affidavit. This form notifies the IRS that someone has used your Social Security number to file a fraudulent return. You can file this form even if you haven't received a notice from the IRS.

2. File a Police Report

Contact your local police department to file an identity theft report. This creates an official record of the crime and may be required by credit bureaus or financial institutions.

3. Contact Credit Bureaus

Place a fraud alert or credit freeze on your credit reports with the three major credit bureaus (Equifax, Experian, and TransUnion). This prevents criminals from opening new accounts in your name.

4. File Your Legitimate Return

Even if a fraudulent return was filed using your Social Security number, you must still file your legitimate tax return. You may need to file by paper mail if the IRS has flagged your account, but you should file on time to avoid penalties.

5. Respond to IRS Notices

If you receive notices from the IRS about a return you didn't file, respond immediately. Do not ignore these notices, as they may indicate identity theft. Follow the instructions in the notice, which typically direct you to contact the IRS Identity Theft Victim Assistance unit.

6. Keep Detailed Records

Maintain copies of all:

• IRS notices and correspondence
• Police reports
• Identity theft affidavits
• Credit monitoring reports
• Any other documentation related to the identity theft

IRS Identity Theft Victim Assistance

The IRS has a dedicated Identity Theft Victim Assistance unit that helps victims resolve identity theft cases. This unit:

• Assigns specialized caseworkers to identity theft victims
• Expedites resolution of fraudulent returns
• Provides clear communication about the status of your case
• Coordinates with other IRS departments to ensure your account is properly marked

Contact the Identity Theft Victim Assistance unit at 1-800-908-4490 if you believe you're a victim of identity theft tax fraud.

Civil Penalties and Criminal Liability

Victims Are Not Liable

Identity theft victims are not responsible for:

• Taxes owed on fraudulent returns filed in their name
• Penalties or interest on fraudulent returns
• Criminal prosecution for fraud committed using their stolen identity

The IRS will remove all fraudulent tax assessments once identity theft is verified.

Perpetrators Face Severe Penalties

Criminals who commit identity theft tax fraud face:

• Criminal Charges: Wire fraud, identity theft, and tax fraud charges carrying up to 20 years in prison
• Financial Penalties: Restitution orders requiring repayment of all fraudulent refunds
• Asset Forfeiture: Seizure of assets purchased with fraudulent refunds

In the 2023 $100 million scheme, multiple defendants faced decades in prison and millions in restitution orders.

Forms and Resources

• Form 14039 - Identity Theft Affidavit
• IRS Identity Theft Central - Comprehensive resource for identity theft victims
• Get an IP PIN - Request an Identity Protection PIN

Conclusion

Identity theft tax fraud is a serious crime that affects hundreds of thousands of taxpayers each year. However, the IRS has established robust protections for victims, including halting collections, removing fraudulent assessments, and providing specialized assistance. If you discover you're a victim of identity theft tax fraud, act quickly by filing Form 14039 and contacting the IRS Identity Theft Victim Assistance unit. With proper documentation and cooperation with the IRS, victims can resolve these cases and protect themselves from future fraud.

Remember: You are not responsible for fraudulent returns filed using your stolen identity, and the IRS will not pursue collection actions against verified identity theft victims. The focus of criminal investigations is on the perpetrators, not the innocent victims whose identities were stolen.