Stolen personal identities are used to open credit card accounts, utility accounts, and other accounts, or for various tax related transactions or filings, and can easily ruin their victims’ credit history. There are 3 common types of identity theft involving tax matters:

  1. Using the victim’s social security number (“SSN”) on a false tax return and claiming a refund.
  2. A worker using the taxpayer’s SSN resulting in additional income being reported to the IRS.
  3. A business reporting paying wages to a person even though they did not work for the employer to reduce the business’ taxable income and tax liability.

Discovering and Reacting to the Theft

The taxpayer usually does not find out immediately or perhaps at all their SSN is compromised.

If a taxpayer does not learn of the fraud until collection activity occurs, they need to respond to the IRS immediately, including using the Offer in Compromise Program, asking for Audit Reconsideration, or having the case heard in the United States Tax Court.

If the IRS determines a taxpayer’s SSN has been compromised it will request the documentation listed below, and If not timely provided the SSN will be frozen and a new SSN will be issued to the taxpayer until the matter is resolved.

Fraudulent returns

When a fraudulent tax return is filed, the thief uses an address other than that of the taxpayer to receive the refund check. The IRS updates the taxpayer’s account with the new address and sends all IRS notices to the new false address, so the victim does not receive any notices. The taxpayer typically finds out about the fraudulent return after filing their tax return, which is rejected or an expected refund never arrives.

The taxpayer then must provide documentation to the IRS to demonstrate they are the owner of the stolen SSN, e.g., copy of a

  • driver’s license
  • passport
  • social security card, and
  • police report or FTC Affidavit of Identity Theft.

The taxpayer’s account should then be coded which hopefully protects their account in the future.

Fraudulent work purposes

The taxpayer eventually receives a notice that they need to file a tax return or that their tax return has been changed, and must respond accordingly to prove that they did not have the improperly reported income. Usually this is done by obtaining information from the employer reporting the wages or by showing that they did not live in or near the location from which the incorrect income was reported.

It is imperative that the taxpayer comply with the Service’s requests in this situation to ensure that an assessment is not entered against him and that collection activity does not occur. If collection activity has occurred, the taxpayer should follow regular avenues for disputing the tax assessed.

Service Assistance

The IRS established the IRS Protection Specialized Unit and Identity Theft Hotline at 1-800-908-4490. If you are unable to work with the unit, or the unit is not properly handling your matter. Taxpayers should turn to the Taxpayer Advocate Service at 1-877-777-4778 if the Service has not properly resolved the matter. The advocate’s office will assign the case to a specific individual and will make contact for this matter easier.