The Branson’s 2010 federal income tax filing had been extended and, in October of 2011, they attempted to file their tax return electronically. They were expecting an $80,000 refund. Even so, they were surprised but not alarmed when their electronic filing was rejected. They assumed it was a small glitch in the transmission when the IRS claimed that a tax return for Michael had already been filed.
Michael sent the IRS a paper copy of the couple’s joint tax return in late October and felt the problem was resolved. Then, in December, the Bransons received another IRS notice. This one claimed that Jan hadn’t filed a tax return for 2010. Just another IRS error? Or an indication of a more serious problem?
Unfortunately for the Bransons, they were victims of identity theft. A thief, using Michael’s name and social security number, filed a fictitious tax return with a much smaller refund due and then absconded with the money. The Bronson’s $80,000 refund is still in limbo.
This type of identity theft—filing fraudulent tax returns in order to claim income tax refunds from the IRS—is increasingly prevalent.
According to IRS Deputy Commissioner Steve Miller, last year the agency stopped “more than 260,000 fraudulent tax returns involving confirmed cases of identity theft, preventing an estimated $1.4 billion in refunds from reaching suspected criminals.” This is a dramatic increase from the previous year, when the numbers were just under 50,000 fraudulent returns representing $250 million in refunds.
In 2012, the IRS has been even more aggressive in pursuing fraud and identity theft cases, recently announcing the results of a massive national effort to crack down on suspected identity theft perpetrators as part of a stepped-up effort against refund fraud and other identity theft. “This unprecedented effort against identity theft sends a strong, unmistakable message to anyone considering participating in a refund fraud scheme this tax season,” said IRS Commissioner Doug Shulman. “We are aggressively pursuing cases across the nation with the Justice Department, and people will be going to jail.”
Although the IRS has added a number of unique identity theft indicators and filters to help address such cases, there’s no simple solution to the problem. All a thief needs is your name and social security number to file a fraudulent tax return. Some also generate a false W-2 or 1099 to ensure the IRS can match at least a portion of the income that supports the refund claim.
Typically, the false claims for refunds are for fairly small amounts, as the thief usually isn’t privy to the victim’s financial circumstances and large refunds might draw attention. In the case of Jan and Michael Branson’s problem, however, the fact that the refund claim was less than $10,000 drew the IRS’ attention. The couple had made an estimated payment of well over $100,000 just a few months before and it wasn’t reflected on the fraudulent return.
So what can you do?
The single most important thing you can do to protect yourself from this type of fraud is to protect your social security number. A thief can’t file a fraudulent return in your name without it.
Unfortunately, even if you are careful, there are other ways an unscrupulous person can obtain your social security. Many of the numbers used to file fraudulent tax returns were stolen from businesses that had the numbers on file for legitimate business purposes, such as banks and hospitals.
Significantly, thieves must have filed their tax returns with the IRS before the real returns are filed in order for the scheme to work. Filing your tax return as soon as is reasonably possible may help to reduce the likelihood you’ll be scammed. If your return is processed first, the thief’s return will be the one flagged as a duplicate.
Finally, if you receive a notice from the IRS that you weren’t expecting and don’t understand—particularly anything that indicates you’ve already filed a return when you know you haven’t—contact your Bader Martin tax advisor immediately. We can help you communicate with the IRS to resolve the matter.