Tax identity theft has grown exponentially over the past several years. Identity theft has topped the Internal Revenue Service’s “Dirty Dozen” annual list of tax scams for both 2012 and 2013, and also appeared on the list in 2011. According to the National Taxpayer Advocate Service, identity theft grew by more than 650 percent between fiscal years 2008 and 2012. Unfortunately, the predictions are that this trend will continue, even in the face of growing safeguards that are currently being put into place by the IRS, tax practitioners and taxpayers themselves. An audit report released in August 2012 by the Treasury Inspector General for Tax Administration estimated that during the next five years, the IRS could lose a projected $21 billion to fraudulently claimed tax refunds related to identity theft. This figure, according to TIGTA, takes into account the new fraud controls that the IRS has put in place that the agency touts as having saved $20 billion of fraudulent refunds on 2012 returns alone.

Impact On Individual And Businesses

Generally, identity theft as encountered by the IRS, typically involves a taxpayer’s stolen Social Security number that is then used to file a tax return and claim a fraudulent refund. When the legitimate taxpayer then files their return, the IRS rejects it. The taxpayer must correct the situation to obtain their refund, which in many cases can consume a considerable amount of time, effort and expense. In best-case scenarios, a six-month delay has been common. Identity theft usually plays out differently when a business taxpayer’s identity is stolen. Similar to return filings for individuals, the theft can occur in the form of a fraudulently claimed tax refund, but often involves more subtle schemes that remain undetected until the business receives a notice from a government agency related to unpaid employment taxes, erroneously claimed tax credits, unreported merchant payment card income, and similar business transaction-generated subterfuge. Read more