With the recent Equifax Credit Bureau identity theft event, and many prior episodes of personal identifying information being stolen (Yahoo, etc) that appears to happening all the time now, I thought an article would be helpful on how your tax returns are affected by such events, and concrete steps you can take to protect yourself (and your parents if they are elderly).
From my experience as a CPA and Tax Attorney, if you think you are completely protected from identity theft issues by hiring a credit monitoring company, you are partially incorrect. The value of these companies is that they alert you if someone has stolen your identity and used (or try to use) this information to obtain credit. The problem is that often that the notification of this is after the crime has occurred, and you still have to deal with the clean-up. You may be better off pulling your own credit report every four months (from the three free ones you get every year) and doing this work along with a credit monitoring company just to make sure its done correctly. This is also a good way to make sure that your credit information is generally correct, and you can dispute any incorrect items through the credit companies.
From a tax perspective, the “bad guys” are using your social security number and other identifying information to get tax refunds. They do this by filing false income tax returns with your information, and typically having the refund directly deposited into a foreign bank account they control. When this happens (per the IRS 14,000 times it was done in 2016), you typically only find out when you file your legitimate income tax return, and are told by the IRS that a tax return has already been filed, and a refund already issued. The IRS will not go after you for the false refund, but this creates a huge mess that you will be dealing with for 1-2 years. Well, the question is, how do you avoid such a mess? The IRS has a program where you can request a PIN that they would send you, and you would use when you file your income tax returns. The “bad guys” would not have this PIN, so they would be blocked from filing a false tax return. As with most IRS related matters it is not easy to get a PIN (hopefully this will change someday). To obtain a PIN, you need to file Form 14039 (Identity theft Affidavit) with the IRS, and request one. When you file this form, the IRS will also mark your account as having a higher risk of fraud, and keep an eye on it for you. In addition, you should also obtain and examine your IRS tax account transcripts and review the activity for filed tax returns and refunds. I would take this step every six months. Therefore, with the PIN filing method, and reviewing your account at the IRS twice a year, you should feel confident that you have this issue under control with them.
If you think that fraud has occurred, do not pick up the phone and call the IRS. Please go in person to the local IRS office with your birth certificate, two picture ID’s, and copies of your tax returns for the last three years to prove who you are, and to explain what happened.