Kelly Phillips Erb
Feb. 2, 2018
With tax season in full swing, identity theft-related tax fraud has become a hot topic. While taking steps to protect yourself from identity theft is always smart, it’s important that you don’t get too caught up in the hype.
I’ve received a number of emails from panicked taxpayers who, after watching various news spot on the dangers of identity theft related tax fraud, are feeling confused and pressured. Unfortunately, some of the advice making the rounds – while certainly sensational – isn’t very practical. Here are five things you need to know about identity theft and tax returns:
1. Not all data breaches or computer hacks result in identity theft related tax fraud. Yes, there are a number of scams out there, and yes it’s possible that certain of your personal information has been compromised. There’s not a week that goes by that we don’t hear about some kind of breach – from Anthem to Target to Yahoo. But it’s important to understand that not every data breach results in identity theft, and not every identity theft is tax-related identity theft.
Before you assume that your tax return may be affected, you need to find out type of personal information was stolen. The Internal Revenue Service (IRS) advises taxpayers who have been a victim of a data breach to keep in touch with the company that lost your data. You want to learn what data was lost or stolen, as well as what the company that lost your data is doing to protect you. Some companies may offer credit monitoring or other services to assist you.
2. Filing early doesn’t prevent identity theft. It is true that the IRS encourages taxpayers to file early to reduce the risk of becoming a victim of identity theft related tax fraud. That’s because if you file first, an identity thief can’t improperly claim your tax refund or wreak other havoc with your tax account. However, it’s important to understand that an identity thief can’t file a fraudulent return using your identity without first having access to some of your personal data. That means if you’re a victim of identity theft, you’re still a victim even if your tax refund isn’t compromised. While filing early may head off tax return related troubles, it doesn’t change the underlying problem that your stolen data may still be used in other ways – like opening a credit in your name or having your data sold on the Dark Web. If you know that you’ve been a victim of a breach or a hack, don’t get too comfortable just because you successfully filed your tax return early: You should still follow-up with the company that lost your data (see again #1).
3. Rushing to file an incomplete return isn’t a good strategy. In the rush to file tax returns early, many taxpayers are under the impression that they can simply file an incomplete or inaccurate tax return now and figure out the details later. This is not a great strategy. Not only does “later” rarely come as planned, leaving you with un-filed or incorrect tax returns, delays in filing properly can cost you in the form of penalties and interest. You may also attract the attention of the IRS since multiple errors on a return could inspire a second look or invite an exam or audit. While taking steps to protect your tax account are important, don’t lose sight of the forest for the trees: File when you’re ready.
4. Not every taxpayer needs an IP PIN. I cannot tell you how many times this week alone I’ve received inquiries about obtaining an IP PIN. Recent news programs and articles have suggested that the answer to worries about identity theft related tax fraud is to obtain an IP PIN from IRS. That’s not completely true.
An IP PIN, or Identity Protection Personal Identification Number, is a six-digit number assigned to eligible taxpayers to prevent the misuse of their Social Security Number on a fraudulent tax return. Since you must file your tax return using an IP PIN if you have one, it allows IRS to verify that you’re the correct owner of the Social Security number on your tax return.
But the IRS doesn’t just hand out an IP PIN to anyone: To get an IP PIN, you must be eligible. Eligible taxpayers include those who received a letter from the IRS inviting them to ‘opt-in’ to get an IP PIN (usually this happens once you’ve been a victim of tax-related identity theft), or those who filed a federal tax return last year with an address in Florida, Georgia, or the District of Columbia (part of an ongoing pilot program since those geographic areas have highest per-capita percentage of tax-related identity theft in the country). You cannot opt in to an IP PIN if you don’t meet the criteria. I confirmed directly with IRS that this remains this case despite news circulating to the contrary.
5. An IP PIN isn’t a one-time fix. Not only can you not opt in to an IP PIN unless you’re eligible, you can’t opt-out of an IP PIN once you’ve received one. If you are assigned an IP PIN, be prepared to use it: You must use your IP PIN when you file your federal tax return not only this year but in all future tax years. If an IP PIN isn’t entered correctly on your tax return when you e-file, the IRS will reject the return. If an IP PIN isn’t entered correctly on your tax return when you file by paper, your return will take longer to process (and any related refund may be delayed). For more information about IP PINs, check out the IRS’ frequently asked questions.
It’s important to be alert and careful this tax season – but don’t let panic set in and paralyze you. Take steps to protect your financial information, use trusted sources, and watch for announcements and update from IRS.