Tax Issues in Identity Theft

Identity theft is on the rise and is a frustrating process for victims. Some studies estimate that over nine million persons a year are victims of identity theft.  One major aspect of identity theft is dealing with the various taxing authorities, particularly the Internal Revenue Service (“IRS”), when someone uses your identity for criminal gain.  This blog discusses the basic procedures for dealing with the IRS when someone is a victim of identity theft.  However, if you are a victim of identity theft you may want to consult with a professional, such as a tax attorney, before contacting the IRS.

Identity theft occurs when someone uses someone else’s personal information such as name, Social Security number (“SSN”) or other identifying information, without their permission, to commit fraud or other crimes.  An identity thief can use a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund. Typically, the identity thief will use a stolen SSN to prepare a tax return and attempt to get a fraudulent refund early in the filing season.  Therefore, a victim may be unaware that this has happened until after they file their return later in the filing season and discover that two returns have been filed using the same SSN.

Given the fact that anyone can be a victim, it is important to be on alert for IRS notices or letters that may indicate that identity theft has happened.  Such IRS notices can include a notice that more than one tax return for a taxpayer was filed, a notice that there is a tax balance due, a notice that collection actions has been taken against a taxpayer for a year he did not file a tax return, and IRS records indicating that a taxpayer received wages from an employer unknown to him.

A taxpayer has the burden of proving that he or she was a victim of identity theft.  Therefore, if you or someone you know receives notices from the IRS the taxpayer should respond immediately by responding to the name and number printed on the notice or letter. A taxpayer will probably also need to fill out a Form 14039 (IRS Identity Theft Affidavit) to straighten out the tax mess.

Being proactive may be the best way to deal with identity theft.  If a taxpayer’s tax records are not currently affected by identity theft, but there is reason to believe it may be at risk due to a theft, questionable credit card activity or credit report, a taxpayer should contact the IRS Identity Protection Specialized Unit.  In addition, the California Franchise Tax Board also should be contacted if identity theft is suspected.  A taxpayer should contact the FTB ID Theft Resolution Coordinator if they believe that their tax records have been affected by identity theft

Lastly, a taxpayer should take precautions to minimize the chance that identity theft will occur.  Common precautions include:

• Do not carry your Social Security card or any document(s) with your SSN on it.
• Only give a business your SSN when it is required.
• Check your credit report every 12 months.
• Protect your personal computers by using firewalls and virus software.
• Do not give personal information over the phone or the internet.

One more important precaution is to always file your tax returns timely.  If you fail to file your tax returns for a few years you may be a victim of identity theft without knowing it as the IRS sends notices and correspondence to the address on the last return filed.  Identity theft is on the increase. A taxpayer must take a diligent role it its prevention, exposure and mitigation.