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Early Tax Filing Protects Against Identity Theft, Fraud

There's a new reason to file your taxes early next year: you might thwart an identity thief.

Identity thieves have used stolen information to beat victims to their tax filings. They file false reports, get large refunds and create a mess for the real taxpayer.

The number of taxpayers caught up in identity theft has more than doubled over the last few tax seasons. And the Internal Revenue Service’s own fraud controls haven’t kept up. Federal auditors have identified 1.5 million tax returns that the IRS had not found, with fraudulent refunds totaling more than $5 billion.

The identity theft problem hasn’t changed. Thieves steal documents or hack data that give them personal details on an individual. They submit a false tax return early in the tax season and collect refunds averaging $3,500 while the real taxpayers are still collecting documents.

J. Russell George, inspector general for Tax Administration, told a Senate committee last Wednesday that tax fraud could cost the system $21 billion dollars over the next five years.

The problem is also happening here in Washington. University of Washington reported that a cluster of employees have been victims of identity theft leading to tax fraud. An investigation is underway.

Some thieves steal documents to get the information they need, others hack institutions. Payment is easy. The IRS has been criticized for making refund payment too easy for thieves to exploit. The IRS deposits refunds directly to pre-paid debit cards.

Victims usually find out their identity has been stolen when they make their tax filing and the IRS rejects it, reporting the victim has already filed their taxes.

One preventative action is to contact the IRS and apply for a PIN number so that future tax filings can’t occur without your involvement. And if you are a victim of tax fraud, you will need to scour the rest of your financial life for signs of fraud.  

In theory it’s the tax system that loses when fraud happens, not the honest taxpayer. However victims report it can take many months to get the tax refunds they are entitled to.

Help Carolyn Adolph follow up on this story.