In this scam, someone files a tax return using an unsuspecting taxpayer’s Social Security number. The scammer receives a refund. Then when the real taxpayer tries to file a return, it’s kicked back from the IRS.
And the identity theft problems of the taxpayer begin.
No matter how tightly-held your personal information is, there’s little you can do to protect yourself from this scam.
“It’s not a matter of whether. It’s a matter of when,” said Clare Wherley, a certified public accountant with Lassus Wherley in New Providence.
When we spoke to Wherley earlier this week, she had just discovered that yet another client appeared to be a victim of this con. She’s had half a dozen others, she said.
Tax advisors and financial planners say refund fraud is a growing problem as scammers have kicked it up a notch. In 2015, the rip-off made the IRS’ “Dirty Dozen” list of tax scams.
Tax authorities are trying to fight back, but it’s a slow go.
The IRS said it has stopped 19 million suspicious returns, saving more than $63 billion in fraudulent refunds between 2011 through October 2014.
And the Identity Theft Clearinghouse (ITC), the federal government’s centralized identity theft complaint database, had more than 7,600 individual identity theft leads involving approximately 1.47 million returns with over $6.8 billion in refunds claimed. That’s just since 2012.
In New Jersey, the state’s Division of Taxation said it prevented 10,200 fraudulent or erroneous refund claims in 2013, the most recent year available.
“We instituted new procedures this year in an attempt to combat identity theft and refund fraud,” said Treasury spokesman Joseph Perone. “Since the start of the filing season, we have given extra scrutiny to 950,000 returns – out of more than three million total filings so far – because of potential red flags.”
He said Taxation determined most of the questioned returns were legitimate, so refunds were issued. But it’s still reviewing 50,000 returns, or about 5 percent of that total, Perone said.
ANATOMY OF THE SCAM
For a closer look at this fraud, we asked Wherley to share the saga of one of her clients.
While they waited for the refund, Wherley tried to e-file her client’s 2012 return.
“The IRS responded, `You may have been the victim of identity theft,'” Wherley said. “What we learned later was that when we filed the 2011 return, the IRS put a lock on the file.”
That was because the IRS had already paid out a more than $10,000 refund for 2011 to someone who fraudulently filed a return in her client’s name.
Wherley was surprised that her client was never notified by the IRS about the 2011 problem.
So they filed the 2012 return by mail, along with the required paperwork — Form 14039, “Identity Theft Affidavit” — and copies of her driver’s license and passport to prove that the taxpayer really was who she said she was.
Then Wherley did some investigating.
That’s when she learned the con artist who filed in her client’s name received a refund of more than $10,000. The refunded amount was actually more than the client had withheld that year. A missed red flag for the IRS?
Wherley also learned that the fake return was filed for a single person with no children, while her client always filed as Head of Household with two dependents.
“What was mind-boggling to me is that the IRS, at that stage, was not doing any comparison of returns to prior years,” she said. “The fake return was so different from anything my client had filed before and they just shot out the refund anyway.”
All these years later, Wherley’s client is still waiting for the refund she was due for her in 2011 return. She still can’t e-file, and each year she needs to add that good old Form 14039 to her return.
Wherley said with this kind of fraud getting out of control, the IRS, while improving its investigations, is still behind the curve. Not helping are outdated computer systems and a short tax filing season.
“It’s getting very common,” Wherley said of refund fraud. “It’s scary.”
That’s because there’s very little a taxpayer can do to protect themselves from becoming a victim.
But what you can do, Wherley said, is limit the damage.
“We’re going to recommend that clients underpay,” she said.
If you usually get a refund, you should re-evaluate your withholding so you come closer to breaking even every April 15. If your returns do get tangled up with a fraudulent one, at least the government won’t be holding on to thousands of dollars you were expecting in your refund.
Next, do your best to file as early in the tax reporting season as possible. The scammers tend to file fake returns early in the season so they can beat the real taxpayer to the punch. If you file first, it’s the scammer’s return that will be rejected.
Wherley also recommends you make sure your financial life is “locked down.” She recommends you contact the custodians of your investment accounts and ask for multi-factor authentication. Tell them not to allow verbal instructions on your account without a verbal password.
And be sure to check your credit reports regularly (you can do that for free once a year at AnnualCreditReport.com) and consider purchasing a credit monitoring service.
IF YOU BECOME A VICTIM
If it happens to you, find your patience. You’ve got some paperwork ahead of you, and you should expect it to take many, many months to clear your name.
Start with notifying the IRS with Form 14039. Make sure you still file your returns on time.
Next, file a police report, and then file an online complaint to the Federal Trade
Commission (FTC) or call (877) 438-4338.
Notify all your banking and investment institutions and make sure you have fraud protections in place.
Then, check your credit reports at AnnualCreditReport.com, and then ask each of the credit bureaus (Equifax at 1-800-525-6285; Experian at 1-888-397-3742; TransUnion at 1-800-680-7289) to put a “fraud alert” on your credit file.
You should also check your annual Social Security earnings statement.
And be sure to read the IRS’ Taxpayer Guide to Identity Theft.
Have you been Bamboozled? Reach Karin Price Mueller at Bamboozled@NJAdvanceMedia.com. Follow her on Twitter @KPMueller. Find Bamboozled on Facebook. Mueller is also the founder of NJMoneyHelp.com.