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What is Tax Fraud?

The IRS website defines [tax] fraud as “Deception by misrepresentation of material facts, or silence when good faith requires expression, which results in material damage to one who relies on it and has the right to rely on it”.

Simply put, tax fraud is obtaining something of value from someone else through deceit. The IRS definition is, understandably, very comprehensive as it covers the entire spectrum of tax fraud from tax evasion to identity theft and phony tax returns.

The Red Flags of Tax Fraud

We will now walk you through some of the telltale signs of tax fraud that you should be aware of to avoid being victimized.

Your returns have been filed – only, not by you.
You sit down to file your return only to discover that your information has already been used earlier and a refund cheque has been issued.

You receive a tax form from an unfamiliar employer.
Another red flag is that you receive a Form W-2 (Wage and Tax Statement, meant for employees), or a Form-1099 (meant for independent contractors) from a company you have never worked for).

You receive an unexpected tax refund.
A classic sign is that you have an unexpected refund cheque in your mail. This generally happens when a cyber crook, after filing your fraudulent return, has your refund mistakenly sent to your address instead of his own.

The IRS contacts you for identity verification.
If the IRS detects a suspicious tax return, then it contacts you to verify your Social Security number, name, and other information. If upon verification, you are served with the IRS notice CP01E ‘Employment-Related Identity Theft’ stating that you might be a victim of an identity-related theft, there are high chances that you actually are.

The IRS requests verification of unreported income.
As per the IRS’ Guide to Employment-Related Identity Theft, the IRS serves you a CP-2000 notice (Request for Verification of Unreported Income, Payments, or Credits) as a notification of evaluation of additional tax due to unreported income. If, after checking your income and deductions, you still cannot figure out why you owe more money to the IRS, you are, very likely, a victim of a cybercrime.

Your tax preparer makes unusual demands.
If your tax preparer insists that you sign your tax forms before they are complete, doesn’t ask you for a W-2 or 1099 sent to you by your employer, or demands that you pay him/her instead of the IRS, he/she might have malicious intentions. Once your tax preparer has your signature and Social Security number, he will have your refund as well.

The ‘IRS’ calls you to make immediate payment.
This seems to be a scammer-favorite trick because of the quick reward that it offers. The usual pattern involves scammers calling you to make immediate payment to the IRS or be arrested in thirty minutes. Older and more gullible people tend to fall for this trap and end up losing their money. Be aware that IRS never calls anyone to demand payment.

Social Security Administration ‘adjusts’ your benefits.
A classic identity theft crime, you are served with a notice from SSA stating that your Social Security benefits have been ‘adjusted’ or denied because of the wages you didn’t earn. And its converse screams of the same crime, when your Social Security Benefits Statement from the SSA states more income than you’ve earned.

How do Cybercriminals Access Your Confidential Information?  

Data Breach
A data breach is the intentional or unintentional release of secure and confidential information into an untrusted environment. Cyberthieves hack into tax preparation sites and extract Personally Identifiable Information, including your Social Security Number, which compromises your identity and makes you vulnerable to tax fraud.

Lost Wallets
Lost wallets with Social Security Cards in them grant any crook access to the golden key i.e. Social Security Number.

People-Search Websites
People finder services and search engines often go to painstaking limits to collect your data and cash their hard work by selling the same. It is not rare that they reveal someone’s sensitive personal and financial information which may, in turn, lead a cyber crook to their Social Security Number.

How to Fix a Tax Fraud?

Fill in the IRS Identity Theft Affidavit
Form 14039 requires you to state the details of the victim of the identity theft, the reference number of the IRS letter or notice served to them, and whether this is an isolated incident or somebody has also used that information to file a fraudulent return on your behalf.

File a Complaint with the Federal Trade Commission (FTC)
Go to IdentityTheft.gov and open the “Someone else filed a Federal Tax Return using my information” section of the website. Fill out the form and provide any additional information such as your driver’s license number that could be used to verify your identity. FTC also encourages filing a police report.

Report to the National Credit Bureaus
Place a credit freeze with any of the following national credit bureaus – Equifax, Experian, or TransUnion. You only need to report it to one and they will notify the rest. This action will prevent cybercrooks from opening any credit accounts using your personal information.

Preventing Tax Fraud

You might have noticed by now that fixing a tax fraud is quite the hassle. And while there is no way to eliminate the chances of IRS identity theft, you can still drastically reduce its likelihood by taking the precautionary measures:

Ask the IRS for an Identity Protection PIN (IP PIN). Identity theft is, unfortunately, one of the most common causes of fraudulent returns. So, to add another layer of security to your identity and protect your Social Security Number from being misused, you can ask the IRS for an IP Pin.

Remove Your Information from People Search Websites. There are several dozen active people search websites and the only way to be safe from an unwanted attempt at identity theft is to remove your information from there. While each website has its own set of rules for opting out, the process is pretty quick and straightforward for most of them.

Use Strong Passwords. Your devices often contain sensitive personal information and one of the ways to prevent crooks from guessing your passwords is using strong ones.

Prepare for a Break-In. Keep your financial statements, tax returns, employment documents, and bank records somewhere secure in your house to block access to them in case of a break-in.

Final Thought:

The old adage, prevention is better than cure, is quite spot on when it comes to tax fraud. Add ‘awareness’ to the mix and you become quite an unscalable target for a cyberthief.