Identity Theft's Taxing New Trend: Scammers Are After Your Tax Refund

By Molly McCluskey, The Motley Fool

Along with the rapid rise in identity theft has come the explosion of a specialized and sophisticated form of theft: tax identity theft.

During the 2011 tax processing year, roughly 940,000 tax returns were filed fraudulently. This year the number will likely reach 1 million. Even the IRS' own taxpayer advocate, Nina Olson, says the IRS is woefully incapable of handling the boom.

A recently released report from the National Taxpayer Advocate to Congress says that the IRS "has failed to provide effective and timely assistance to victims of identity theft" even as the number of crimes continues to soar. Olson says in the report that tax-related identity theft has risen some 650 percent since 2008.

Scott Mitic, the CEO of TrustedID, says that tax identity theft has grown so rapidly it's caught many people off guard.

"Identity theft is a crime that's anonymous in many cases, but in the case of tax identity theft, the government doesn't have in place the level of protection that many other financial institutions do to prevent fraud," Mitic says. "At this moment, the IRS is one of the weakest links in the financial services world and as a result is highly targeted."

The IRS allows filing of taxes as early as Jan. 19, and prompt thieves will file immediately with the hopes of beating more cautious individuals to their own returns.

Rebate? What Rebate?

Far more advanced than simply intersecting a rebate check or prepaid card, these thieves are stealing year-end statements, W-2s and other income information to file returns on victims' behalf. Americans can legitimately receive their refunds in a variety of ways: direct deposit (often the fastest), loaded onto a prepaid card, or via check mailed to a location of their choosing. Mitic says thieves will often choose prepaid cards.

"Prepaid cards are a source of significant amounts of fraud. If you use tax filing assistant like HR Block or Turbo Tax you could get a refund on a prepaid card," Mitic says. "They're beautiful from a tax ID theft perspective because they're just like cash."

How to Protect Yourself

For the most part, the identity theft methods that we must guard against during tax season are the same ones the criminals use during the rest of the year, and taking your precautionary tactics seriously is the only way to keep your information safe.

• Shred any paperwork not needed for tax preparation.
• Be wary of a slow-running computer or out-of-place pop-ups when filing taxes online.
• Be suspicious of any phone calls or emails claiming to be from the IRS, even with the appropriate logos. According to the IRS website: "The IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels."
• Don't put your return in your office mailbox or in outgoing mail bin at work. "When filing taxes by paper, take them directly to the post office and put them right into a postal worker's hands," Mitic says. "Tax returns are usually pretty obvious, and can easily be snatched."

Bob Meighan, vice president of Turbo Tax, agrees that an ounce of prevention is often worth a pound of cure. "If you take precautions up front, you mitigate the chance that you'll be a victim of tax identity theft," he says. And, he points out, filing online is safer than using a paper return. "We take security and verification very seriously," he says. "All of our customers use passwords to access their accounts, transmissions between our customers and the IRS are all sent on encrypted, secure lines, and we encourage our customers to use common sense practices when filing taxes, and year-round."

Finally, don't get complacent: Odds are you will file your tax returns without incident this year, but tax ID theft is a growing trend. The best way to avoid being a victim this year, and in future tax seasons, is to remain vigilant.

Taxpayers who suspect they've been victims of identity fraud should call the IRS Identity Theft department at 800-908-4490 with a copy of a police report, the completed IRS affidavit (Form 14039 (link opens PDF)), and state-issued identification. You'll find more information in the Taxpayer Guide to Identity Theft on the IRS website.

Motley Fool contributor Molly McCluskey (@MollyEMcCluskey) owns shares of Intuit, which makes Turbo Tax. The Motley Fool recommends Intuit and owns shares of Intuit.