Tax day horror story: taking your money ... and your identity

The IRS is making it a top priority to crack down on the burgeoning tax day scam of identity fraud. In 2011 the agency thwarted $1.4 billion in fraudulent refunds.

As Americans get down to crunch time for their taxes, they have one more worry, besides whether they filled out their Form 1040 correctly: identity theft.

The government has been cracking down on tax preparers with larceny in their hearts, postal employees who can be bribed to hand over sensitive material, and criminal gangs sending e-mails that they claim are from the Internal Revenue Service (IRS). All such individuals are either using other people’s Social Security numbers or trying to steal them so they can file fictionalized tax returns. They will even steal the Social Security numbers of children so they can declare them as dependents.

Many Americans don’t know their information has been stolen until they try to file their returns electronically. The return bounces back, and instead, the IRS asks them to file a paper return. Uh-oh!

“This is probably the most common call we get at this time of year,” says Gabby Beltran, a victim adviser at the Identity Theft Resource Center in San Diego. “The IRS is trying to move fast. It’s a growing crime.”

According to the IRS, the agency stopped $1.4 billion in fraudulent-identification refunds in 2011. That amounted to some 262,000 returns. To put that into context, last year, the IRS stopped $14 billion in false refunds overall. So ID theft fraud was 10 percent of IRS fraud.

The number of cases tripled in the past three filing seasons, the IRS says.

Indeed, the problem ranked No. 1 this year on the IRS’s “Dirty Dozen” tax scams. The agency has formed a special identity-fraud protection unit, which includes help for victims in navigating the system.

“It is one of the IRS’s highest priorities right now,” says an agency official who spoke on condition of anonymity.

On Jan. 31, the IRS and the US Department of Justice conducted a nationwide sweep that targeted 105 people in 23 states. According to the DOJ, the effort included indictments, arrests, and the execution of search warrants related to the potential theft of thousands of identities and taxpayer refunds.

At about the same time, the IRS visited money services, such as check-cashing operations, to make sure those businesses are not involved in the fraudulent refund business. The visits took place in what the IRS termed “high risk” places – Atlanta; Birmingham, Ala.; Chicago; Los Angeles; New York; Phoenix; Tampa, Fla.; and Washington.

In cracking down on the crime, the IRS is finding that the problem has many different elements. For example, last June, undercover law-enforcement agents in New Jersey purported to be in the business of filing phony tax returns. In exchange for money, a mail carrier agreed to provide addresses located along his route in Somerset, N.J., and to divert the resulting tax-refund checks from the mail stream.

Tax preparers have also been a problem. On Jan. 24, Marsha Elmore of Wetumpka, Ala., the owner of a tax-preparation company called Community Tax, pleaded guilty to filing false claims, wire fraud, and aggravated identity theft. According to the Department of Justice, Ms. Elmore used the names, Social Security numbers, and dates of birth of various individuals to file false tax returns. The returns were directed to bank accounts and debit cards that she controlled.

At her sentencing, the court found the intended tax loss to the government, if unchecked, would have been more than $2.5 million. She was sentenced to more than 15 years in prison.

Also at the end of January, a federal grand jury charged three Dayton, Ohio, women with stealing the identities of mentally disabled adults and filing for $170,000 in refunds. According to the indictment, the fraudsters claimed the victims had performed work as household cleaners and claimed fictitious dependents to qualify for the Earned Income Tax Credit.

In testimony last month before a subcommittee of the Senate Committee on Finance, Steven Miller, IRS deputy commissioner, testified that the agency has improved its identity-theft filters. Although Mr. Miller could not be overly specific, he indicated that returns get flagged if there are certain changes in taxpayer circumstances. However, filters can detect fraud when it does not exist.

“For example, annually 10 million of us move and 46 million of us change jobs,” Miller said. “Thus, changes in taxpayer circumstances do not necessarily indicate identity theft.”

One word of caution from the IRS for taxpayers: It does not communicate by e-mail. Anyone purporting to be the IRS online is probably “phishing” – that is, looking for personal, confidential information. Instead, the IRS sends taxpayers written information through the US mail.

The IRS is now issuing special personal ID numbers to taxpayers whose identities are known to have been stolen. The aim is to make it easier for them to file returns and prevent others from using their identities in the future. According to Miller, some 250,000 will be using these ID numbers this filing season.

Taxpayers who have had their IDs stolen can expect delays in getting a refund, says Ms. Beltran of the San Diego center. She estimates it will take three months to a year. “After that, if the victim had been filing electronically, they will be forced to do it by paper and mail it in,” she says.

The IRS says it is aware of the problems that delays can cause. “It is frustrating to the IRS as well,” says the IRS official. “It just takes some time to work through. It’s one of the most complex things we do.”