What is Tax Identity Theft? How You Can Protect Yourself

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Tax Identity Theft Definition

Tax-related identity theft is a distressing and increasingly common form of fraud that occurs when criminals use stolen personal information to file fraudulent tax returns or claim tax refunds on behalf of unsuspecting victims. This malicious act can lead to significant financial and emotional distress for the victims.

In this blog, we'll delve into the world of tax identity theft, how it occurs, and crucial steps you can take to protect yourself from falling prey to this pervasive threat.

What is Tax Identity Theft?

Tax identity theft is a type of identity theft in which criminals use stolen Social Security numbers, names, and other personal information to commit tax-related fraud. The goal is to file fraudulent tax returns claiming refunds and obtain the money before the legitimate taxpayer has a chance to file their actual return. Alternatively, the thief may use the stolen information to underreport income and evade taxes.

How Does Tax Identity Theft Happen?

How can tax identity theft occur? Tax identity theft can happen through various means, and it's crucial to understand the common ways criminals gain access to your personal information:

  • Data Breaches: Hackers target businesses, government agencies, or financial institutions to obtain vast amounts of personal data from data breaches, including Social Security numbers, which they can then use for tax identity theft.
  • Phishing Scams: Criminals send fake phishing emails or messages impersonating trusted organizations, such as the IRS or tax preparation companies, to trick individuals into providing their personal information willingly.
  • Stolen Documents: Thieves may physically steal documents containing sensitive information, such as tax forms or financial records, from homes, offices, or mailboxes.
  • Social Engineering: Scammers use social engineering tactics to manipulate individuals into revealing personal information over the phone or through other communication channels.

Signs That Tax Identity Theft Has Happened

Detecting tax identity theft early is crucial for minimizing its impact. Look out for these warning signs:

  • Receiving a notice from the IRS stating that more than one tax return has been filed in your name.
  • Unexpectedly owing additional taxes, receiving a reduced refund, or not receiving your expected refund.
  • Receiving tax-related documents from employers or financial institutions that you haven't worked with or dealt with.
  • Being unable to e-file your tax return because the IRS detects a duplicate Social Security number on another return.

Protecting Yourself from Tax Identity Theft

Tax identity theft can wreak havoc on your financial life and cause lasting damage if not detected and addressed promptly. By being vigilant, safeguarding your personal information, and staying informed about tax identity theft risks, you can protect yourself and reduce the chances of falling victim to this devastating form of fraud. To safeguard yourself from tax identity theft, follow these preventative measures:

  • Protect Personal Information: Safeguard your Social Security number, tax documents, and other sensitive data. Only share such information when absolutely necessary, and avoid storing it in easily accessible locations.
  • File Early: File your tax return as early as possible before fraudsters can use your information to file a fraudulent return.
  • Use Secure Networks: Be cautious when accessing tax-related websites or entering personal information online. Use secure, password-protected networks and avoid public Wi-Fi for sensitive transactions. Using a VPN such as RAV VPN is also recommended when entering personal information online.
  • Be Wary of Phishing Scams: Never click on suspicious links or provide personal information in response to unsolicited emails or messages.
  • Monitor Your Credit: Regularly check your credit reports and financial accounts for any unauthorized activity or discrepancies. (For more information on credit monitoring, read our blog on credit monitoring services).
  • Use a Reputable Tax Preparer: If you use a tax preparer, choose one with a good reputation and verify their credentials.

Tax Identity Theft And Tax Fraud - What’s The Difference?

Although both involve illegal activities related to taxes, tax identity theft and tax fraud are distinct in their nature and execution. Tax identity theft occurs when an individual's personal information is stolen, and often happens without the victim's knowledge until they attempt to file their legitimate tax return and discover that someone else has already filed using their information. The victim may face delayed refunds, tax disputes, and potential financial repercussions.

Tax fraud, on the other hand, refers to a deliberate and intentional act of dishonesty or deception with the intention of evading taxes, underreporting income, inflating deductions, or falsifying tax-related information on a tax return. This fraudulent activity is carried out by the taxpayer themselves, rather than an external fraudster stealing the taxpayer's identity.

Tax fraud can include actions such as submitting false or misleading information, not reporting income, or claiming false deductions to reduce tax liability unlawfully. These actions can lead to penalties, interest charges, and reputational damage for the taxpayer.

What Is A Tax Identity Shield?

A tax identity shield, also known as tax identity theft protection or tax identity theft monitoring service, is a specialized service or product designed to help individuals protect themselves against tax-related identity theft. It offers proactive measures to detect and prevent fraudulent activities related to tax filing and provides assistance in case of identity theft incidents involving taxes. This service aims to minimize the risk and impact of tax identity theft on taxpayers.

Key Features of a Tax Identity Shield

  • Monitoring Services: Tax identity shields continuously monitor your personal information, such as your Social Security number and tax-related data, for any suspicious activities or signs of potential identity theft.
  • Fraud Alerts: If the service detects any unusual activity, it immediately sends fraud alerts to the individual, notifying them of potential threats and prompting them to take action.
  • Dark Web Monitoring: Some tax identity shields include dark web monitoring, which scans underground forums and websites where stolen personal information is often traded, to check if your data is at risk.
  • Resolution Assistance: In case of tax identity theft, the service provides expert assistance and guidance to help you resolve the issue, including filing an identity theft report with the IRS.
  • Insurance Coverage: Some tax identity shields may offer insurance coverage to reimburse you for expenses incurred due to identity theft, such as legal fees, lost wages, or costs related to restoring your identity.
  • Credit Monitoring: Some services also include credit monitoring features to help you keep an eye on your credit reports for any unauthorized activities.
  • Educational Resources: Tax identity shields often provide educational resources and tips on how to protect yourself from tax-related scams and identity theft.

Is a Tax Identity Shield Necessary?

The decision to use a tax identity shield is a personal one and depends on individual risk tolerance, previous experiences with tax identity theft, and the level of comfort with self-monitoring. While tax identity shields can provide an additional layer of protection and peace of mind, it's essential to remember that no service can guarantee complete protection against identity theft. And as mentioned above, taxpayers can also take several proactive steps to protect themselves and safeguard personal information from tax identity theft, without using a paid service.

Before subscribing to a tax identity shield service, it's essential to research and compare different providers to ensure that the service aligns with your needs and provides adequate protection for your specific situation. Additionally, always be cautious when sharing personal information and only use reputable and trusted services.

Remember to report any suspected tax identity theft to the IRS and take proactive measures to secure your financial well-being. Stay informed, stay alert, and stay safe during tax season and beyond. For more information on identity protection and online security, including the ReasonLabs Online Security browser extension, visit www.reasonlabs.com