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Identity Theft and Your Income Taxes

By Richard H. Stieglitz and David Albrecht
February 28, 2015

In 2013, 13.1 million people were victims of some sort of identity-theft. Often, you may think of identity theft as being confined to credit card or ATM fraud, yet there is an epidemic of fraudulent electronically filed tax returns. Identity-related tax fraud is the third-largest theft of federal funds after Medicare/Medicaid and unemployment-insurance fraud.

It is not until June of each year that the IRS receives prior-year W-2 wage and withholding information that was submitted by employers first to the Social Security Administration. Accordingly, identity thieves will take advantage of this matching gap and file fraudulent tax returns in the January, February and March window-of-opportunity in which the IRS uses the honor system to release refunds. The fraudulent refunds are received electronically or by paper. Bank accounts and post office boxes are then closed immediately. This makes it difficult for the IRS' Criminal Investigation Division (that is increasingly working with local police departments) to apprehend the perpetrators (sometimes working with postal and bank employees) who are often engaged in other criminal activities.

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