Statistics on identity theft show that tax-related fraud causes billions of dollars of financial harm, but tax fraud assistance may or may not be included in identity theft protection products. For comprehensive coverage, an identity theft protection service must include tax fraud assistance.
What is tax fraud?
Instances of tax fraud could involve...
- Phone scams where thieves pretend to be the IRS calling for money or information
- Phishing scams where fraudsters send fake IRS emails or set up unsolicited websites to get money or information
- Criminals using false information or a taxpayer's stolen information to file fraudulent tax returns, thereby getting the victim's refund
- Dishonest tax preparers who defraud their clients with false deductions, inflated expenses or the like
How common is tax fraud?
Every tax season - and all the months in between - the U.S. Treasury Inspector General for Tax Administration (TIGTA) deals with dishonest tax-related schemes. The TIGTA has received well over 90,000 complaints about IRS phone scams and found that victims have lost approximately $5 million.
In 2013, the Federal Trade Commission (FTC) received 1,455,146 identity theft complaints - a third of which stemmed from tax-related fraud. In 2014, the FTC's 1.5 million fraud-related complaints revealed that consumers have paid a total of $1.7 billion because of fraud, and a third of those complaints were also tax-related.
Fake tax returns cause problems, as well: $4 billion of tax refunds went to fraudsters after they sent in fake tax returns to the IRS.
How do identity theft protection plans address tax fraud?
Unfortunately, not many products provide services specifically geared toward preventing tax fraud. Common features, like credit monitoring, are less likely to catch these kinds of crimes because tax information is not connected to the main credit activity being monitored.
Another reason for lack of tax fraud assistance could be strict limitations on a third party's ability to communicate with the IRS. The IRS requires that anyone communicating with it on a victim’s behalf must have IRS-approved credentials (e.g. enrolled agent, certified tax preparer or certified public accountant).
The upkeep of a tax fraud assistance division can get expensive, as well. A significant amount of time and money are needed for finding approved specialists, giving them the time to work through each case and maintaining the correct credentials. Some certifications involve continuing education, periodic renewal fees that can really add up and purchasing and maintaining a tax preparer bond in the thousands of dollars.
Despite limited capabilities to detect that a member is a victim of tax fraud or act on a victim's behalf with the IRS, a specialist could still assist victims by guiding them on what to do next and giving them the necessary resources to carry out the steps themselves.
How can you avoid tax fraud?
First, whether it's on your own or through an identity theft protection plan, tap into resources about how to avoid victimization. For example, learn how to pick a reliable tax preparer and how to handle tax documents with confidential information.
Second, make sure your protection plan includes Social Security number (SSN) monitoring because your SSN is a key piece of information that the IRS uses to confirm your tax return actually came from you. In some instances, if a taxpayer's SSN is at risk, the IRS will issue a special PIN number that differentiates the taxpayer's real tax return from the thief's fake ones.
Third is tax fraud assistance, which provides access to professionals who will help victims report the crime and address the resulting issues. Victims of tax scams deal with the same burden of significant financial losses and rebuilding reputations that accompany any other kind of fraud. Support from people who are familiar with both the tax system and identity theft recovery will give victims direction and help them take action.
Taxes are already frustrating for many, so adding the problem of identity theft only aggravates the situation. The statistics prove that tax fraud is relevant and must be taken into account when building security against identity theft and fraudulent activity.