All About Tax Identity Theft & How to Prevent It

Identity theft has grown to be a persistent problem around the world. According to the most recent report published by the U.S. Bureau of Statistics in October 2023, about 24 million individuals became identity theft victims between 2020-21. The losses associated with identity theft totaled a staggering $16.4 billion.

Identity theft occurs in many ways, with tax identity theft increasing yearly. Records indicate over 1 million tax returns were flagged in 2023 by the IRS as being filed by possible identity thieves. Unfortunately, no one is 100% safe from becoming a victim of identity theft, including tax identity theft. Having an Employer Identification Number (EIN) is much safer than using your Social Security number for your business.

While you cannot guarantee it won’t happen, you can take proactive measures to protect yourself from becoming a victim. In this post, we’ll talk about what tax ID is, how tax identity theft occurs, and what steps you can take to decrease the chances of becoming a victim.

What is Tax Identity Theft?

When an individual uses another person’s Social Security number to claim a fraudulent tax refund or file a fraudulent tax return, this is called tax identity theft.

Ways identity thieves steal SSNs

The identity thief finds a way to obtain the victim’s Social Security number and other PII (personally identifiable information) and uses it for illicit gain. Common ways ID thieves get SSNs include:

• Email phishing
• Phone and text phishing
• Buy PII from criminal sources
• Stolen purses and wallets
• Mailbox theft
• Dumpster diving

Scammers may also obtain SSNs and PII by posing as legitimate entities, such as employers, bank representatives, credit card customer service, government agencies, IRS employees, or other authorities.

 How do victims discover they are tax fraud victims?

After the scammers have the information they need, they’ll file a fraudulent tax return using a post office mailbox or a false address, so the victim never receives mail from the IRS. Victims typically don’t initially realize they’ve been victimized until long after the crime was committed.

Here’s how victims typically discover what’s happened.

• Trying to file their own tax return and receive an IRS notice a return was already filed
• Receiving unrequested tax transcripts in the mail
• IRS records indicate the victim earned income from a place where they were never employed
• IRS sends a notice to the taxpayer indicating they opened an online IRS account
• IRS sending a notice an existing account was disabled or accessed, and the taxpayer didn’t take these actions
• Being assigned an Employer Identification Number (EIN) that the individual did not apply for

Preventing Tax Identity Theft

Unfortunately, any form of identity theft is a risk, and it’s difficult to circumvent this crime with any guarantee of your safety. The good news is you can take preventative measures to safeguard your PII and SSN.

• Never carry an SSN card in your purse or wallet (memorize it instead)
• Create strong passwords for online accounts
• Use unique passwords for each website or app used
• Use security software with a firewall
• Always secure internet connections when filing taxes or doing any business online with PII
• File taxes as soon as possible so scammers cannot file first
• Fully shred bank statements, credit card statements, and other documents containing PII
• Consistently watch your credit score
• Check your credit reports regularly
• Use encryption for digital files containing PII
• Use multi-factor authentication when filing taxes electronically
• Be wary of scammers pretending to be IRS agents
• Never share PII or SSN with anyone calling, emailing, or texting (the IRS sends USPS mail to taxpayers)
• Check licenses and certifications before entrusting a tax preparer to file tax returns

Identity thieves are usually persistent and apply high-pressure tactics to get the information they need to defraud people. Always be on guard!

How to Identify a Potential Identity Scammer

Identity thieves are savvy and have many tricks to fool people. Unfortunately, they work hard to stay one step ahead of everyone to successfully – and illicitly – earn money from their scams.

What to look for to indicate ID theft

Identity thieves are very good at what they do, but you can learn how to spot the warning signs with a keen eye. A good place to start is to read up on the warning signs of phishing, which occurs via phone, email, text, social media, or even in person.

Always verify who you’re speaking with, never click unsolicited links in email or text, always use official websites/contact information (e.g. don’t reply to emails or call phone numbers listed in them), and ask for ID if someone comes to your home or workplace.

Remember, identity thieves apply high-pressure tactics when targeting victims they can exploit. They aim to get you to think quickly by invoking fear or urgency so you don’t have time to think about what they’re asking.

Signs identity theft has occurred (can lead to tax fraud)

Potential victims often ask themselves, “How can tax identity theft occur?” In addition to the signs that tax fraud has occurred, if you see other seemingly unrelated red flags, you want to investigate to prevent further damage. The sooner you catch ID theft, the better.

Before committing tax fraud, ID thieves might try to drain your bank account or run up your credit card. Some red flags are:

• New credit cards or loans appearing on your credit report
• Strange transactions appearing on your bank statement
• Hard inquiries show up on your credit report if you didn’t apply for credit
• Credit scores dropping significantly and suddenly
• Unfamiliar credit card challenges appearing (even if they’re low dollar amounts)
• Recurring or singular online bill payments do not go through when funds are sufficient in the bank account
• Unexpected denials of loans and credit card applications
• Phone calls arriving from unfamiliar debt collectors
• Credit card companies send alerts about purchases not made
• Receiving strange medical bills
• Suddenly being locked out of bank and/or other online accounts
• Routine mail going missing, such as credit card bills or bank statements

These unusual activities merit immediate action. Don’t delay because procrastinating could result in thieves running multiple scams against you, ruining your good name, and negatively impacting your financial standing.

What to Do If Someone Files Fraudulent Taxes In Your Name

Discovering you’re a victim of tax fraud is scary, frustrating, and perhaps leaving you unsure of what to do next. This is a set of circumstances you don’t want to delay taking action. It is important to notify the IRS right away. Here are the important steps you should take.

• File an identity theft report with your local police department
• File IRS Form 14039 to alert the federal tax agency that someone is using your SSN to file a fraudulent tax return
• Gather documentation to accompany Form 14039 as requested by the IRS
• Request all three primary credit reporting agencies, Equifax, Experian, and TransUnion, to place an immediate freeze on your credit reports
• Go to the Federal Trade Commission’s (FTC) official website and file an online theft report

Apply for an EIN To Protect Your Personal Identity

It’s a good idea for all businesses to obtain an Employer Identification Number (EIN), even if they are not required by law to have one. While running a business, you’ll most likely work with third parties (like vendors or anyone who pays you) and have to provide them with tax-related information so they can file their proper forms.

Tip: If you have one or more employees working for you, you must obtain an EIN

Keep your SSN private

Without an EIN, you’ll need to provide your Social Security number (SSN) to any applicable third parties instead. Having your SSN stored with other companies puts you at higher risk for identity theft since you lose control of how they secure data, or you might be a victim of a data breach. With an EIN, you can provide this tax ID number instead, preserving the privacy of your SSN.

Necessary information to apply for an EIN

To apply for an Employer Identification Number, you must assemble certain information to enter on the application.

• Your legal business name
• DBA (“doing business as”) designation, if applicable
• Business structure entity type (e.g., sole proprietorship, partnership, LLC, S-Corp, etc.)
• Name of person responsible for the company, along with their SSN or ITIN
• Choose the reason why you are applying for an EIN
• List how many people work for you or how many you anticipate hiring

Once you’ve completed your EIN application, review all questions to make sure you’ve answered, proofread your submission, apply, and wait for a response.

Conclusion

Identity theft is a prevalent societal problem, and as a result, tax ID theft is on the rise. However, you can prevent ID theft by educating yourself on the risks, knowing what steps to take to prevent it, and knowing what to do in the event a thief does obtain your SSN or other PII. Remember, the more quickly you act, the better you can limit the damage.