Wednesday, April 30, 2014

I.R.S Scams and Identity Theft

I.R.S. Scams and Identity Theft

Bert Whitehead, M.B.A., J.D. ©

Don't be too surprised if your tax return is rejected by the IRS because someone else has already filed with your social security number. This scam is increasing exponentially, and nearly every tax preparer I’ve surveyed this year has had clients who have experienced this.  One of our clients last year had to come up with $8,700 to avoid liens (which he was refunded), his credit was ruined for a year, and it took him eight months to settle the issues.  That's how he learned it is important to look at his statements every month!

It’s a long, frustrating process to straighten this out if you’re getting a refund. If you owe money to the IRS and send them a check, the matter somehow gets resolved much more quickly.

This is technically identity theft even though these thieves don't have to access any other personal information. To file your return, all they need is your name and social security number. There have been instances where crooks have just used a random number generator to make up social security numbers. If they’re able to obtain other information (PIN #, address, etc.), they may wipe out your bank account.

These fraudulent returns are filed electronically early in the season, such as early February. The crooks make up the information needed from your W-2 so that all the necessary entries are shown on the return they file, and of course they have the refund sent to their address or P.O. Box.

Indications of Tax Fraud

There are several other ways swindlers are fleecing taxpayers. For example, some will call and impersonate an IRS agent and demanding that you immediately pay them using a preloaded debit card or wire transfer.  This scam has recently been reported by an increasing number of clients.  Emails are often used, usually by "phishing," which involves setting up bogus email accounts or websites to induce you to send them your social security number, ostensibly so they can verify it.

Of course there are also dishonest preparers who skim part of their client refunds, or use the information provided to steal cash from legitimate bank accounts. Some scams try to enlist you to help them track a suspect by divulging your bank account numbers. Taxpayers have even been urged to send their money to an overseas bank account to avoid government “spying” by the National Security Agency (NSA).

If you receive a letter from the IRS saying that more than one tax return has been filed in your name, or showing income from an employer you don't know, or a refund offset, you should suspect fraud. If you have lost a wallet or purse and suspect someone may use your information for identity theft, fill out the IRS Identity Theft Affidavit, Form 14039. The toll-free number of the IRS Identity Protection Specialized Unit is 800-908-4490. Be sure to also file a police report, as it will be necessary to provide a copy of the report to various entities when you’re trying to reclaim your identity.

Identity Theft Protection Plans
There are a number of plans available which cost about $100-150 per year that insure against losses from identity theft. A rider to your homeowner or auto policy may be even less, possibly $20-50 per year. The problem is that these services can't keep your identity from being stolen --- only you can do that. If your identity is stolen, all these plans cover is some out-of-pocket costs such as phone calls and postage. These costs are usually less than the deductible, which could be anywhere from $100 to $1,000. 

The most significant problem when your identity is stolen is the need to close your accounts, open new ones, and painstakingly advise creditors of the problem (usually including providing a copy of the police report). No insurance company can do that for you, nor do they reimburse any money which may be stolen from you. So in the worst case it could cost about $1,500 to clean up your identity (not including any losses which are covered automatically by your credit card companies). This hassle is compounded if you’re behind on your bills, as creditors will suspect that your claim is a ruse to further delay payment.
You can obtain ID theft assistance for free. For example, American Express provides 24/7 identity theft assistance to all cardholders with a toll-free number. They will assign an AMEX representative to "help you determine if you identity has been stolen, navigate the recovery process, and protect yourself in the future."

The best known identity theft insurer is LifeLock, which advertizes heavily with well-known celebrity endorsements. However, there are many complaints about their limited services:
·         If you need their help, they only contact banks (not credit card companies).
·         Once you sign on, it is very difficult to get them to cancel you.
·         Their service is very impersonal.
·         They do not monitor activity on your existing accounts, only new accounts opened in your name.

Checking Credit Bureau Reports

Identity theft may become evident through unexpected and unauthorized checks of your credit report. The three main credit bureaus (Equifax, Transunion, and Experian) offer various plans to offset identity theft. I have used Equifax 3-in-1 for about 5 years ( They charge about $150 annually. With this service I’m notified whenever a credit application is made in my name, or when there’s unusual activity on my accounts using parameters that I determine. The most comforting aspect of their service is that I receive an email whenever any of these credit bureaus receives a credit application in my name. In addition, I receive an email every month they have not detected any activity on my account. They also provide a free personal credit report annually.

Do-it-yourselfers can obtain a free credit report from each of the three main credit bureaus annually, so you can diligently check your credit for free every four months. The proper website to obtain these reports is
But if there was fraud involving any of your accounts during the four-month, interval you would miss it. Your credit report does not include your credit score.

Thanks to Shari Cohen and Laura Webber for copy editing