Identity theft is a growing problem throughout the country and it is affecting the filing of tax returns in a major way. The Federal Trade Commission reports that it continues to be the number one consumer complaint reported to the agency year after year.

Identity theft can be a risk every time you swipe your credit card at a store or provide your Social Security number online. On the tax front, clever con artists masquerading as IRS representatives or agents may try to steal your vital information and use it for illegal means. Or an identity thief could file a fake tax return for you in order to obtain a refund.  

Criminals Mine Data from Social Media Sites to Prey on Grandparents

Have you heard of this recent scam? Criminals scour publicly available data on Facebook, Twitter and other social media sites. Then, they locate a vulnerable relative -- generally a grandparent -- and call them pretending to be a grandchild traveling abroad.

Here's a typical "grandparent scam" phone call using information gleaned from the Internet: "Hi Grandma, it's Tom. I'm in Mexico on break from (the name of the university he attends). I got into a car accident and need some money to pay for the damage (or emergency medical treatment). Can you wire me $2,000 right away? Please don't tell my parents because they'll just get upset."

In some cases, the scammers pretend the grandchild was arrested and is in jail. If money is wired, the grandparents may be contacted again, and told additional money is needed.

Meanwhile, the victims' grandchildren are actually safe at home or school.

To pull off these scams, criminals go through social media accounts, searching for information. On many accounts, scammers easily gather names, locations, schools attended, photos and other details that allow them to overcome skepticism when they call the grandparents.

According to the FBI, criminals often call "late at night or early in the morning when most people aren't thinking that clearly."

There are variations on the scam, the FBI reports, including:

1. Instead of the "grandchild" making the phone call, the criminal pretends to be an arresting police officer, a lawyer, a doctor at a hospital, or some other person. Sometimes, the phony grandchild talks first and then hands the phone over to an accomplice...to further spin the fake tale.

2. After perusing a soldier's social networking page, a con artist will contact the individual's grandparents, claiming that a problem came up during military leave that requires money to address.

If you receive such a call, here are some steps to take:

  • Don't be pressured to act quickly.
  • Ask questions that would be difficult to answer unless you were actually in the family.
  • Ask to contact the individual directly. Call the parents or friends to see if the grandchild is really traveling.
  • Don't send money unless you're certain it is your family member.
  • If you've been scammed, contact law enforcement immediately.

Incidences of tax identity theft have increased significantly in the past couple years. The IRS's Incident Tracking Statistics Report shows that 641,052 taxpayers were affected by identity theft in 2011 compared with 270,518 in 2010.

Here are some typical tax identity theft scams:
  • You receive an IRS notice or letter stating that more than one tax return for you was filed. A criminal may have used your identity to fraudulently file a tax return and claim a refund. Generally, identity thieves use a stolen Social Security number and try to file early in the tax season to collect a refund before the legitimate taxpayers file.
  • You are informed by the IRS that you have a balance due, a refund offset or a collection action was taken against you for a year in which you did not file a tax return.
  • IRS records indicate you received wages from an employer unknown to you.

To make matters worse, when two tax returns are filed with the same name and Social Security number, the real taxpayer's refund can be delayed for months while the IRS determines who is legitimate.

"The growth in these cases has overwhelmed IRS resources and burdened taxpayers," according to a recent report by the Treasury Inspector General for Tax Administration (TIGTA).

Problems TIGTA found include:

  • The IRS does not work to resolve identity theft cases quickly. It can take more than a year to resolve them.
  • Communications between the IRS and ID theft victims are limited and confusing. Victims are asked multiple times to substantiate their identity.
  • When a taxpayer calls the IRS to report that his or her electronic tax return was rejected because it appears another individual already filed a tax return using the same identity, the IRS instructs the individual to mail in a paper tax return with the Form 14039, Identity Theft Affidavit, and attach supporting identity documents. However, the IRS has been processing these mailed-in tax returns using standard processing procedures and does not prioritize them.
  • Identity theft guidelines and procedures are dispersed among 38 different Internal Revenue Manual sections. The guidelines are inconsistent and conflicting.
  • The IRS makes little use of the data from the identity theft cases to identify any trends that could be used to detect or prevent future refund fraud.

Despite the criticism from TIGTA, the IRS is aware of the tax identity theft trend. In the latest version of its "Dirty Dozen Tax Scams" for citizens to watch out for -- a list that the IRS has been producing for years -- identity theft is the number one item for 2012. Online "phishing" for personal information is number two.

In response to growing ID theft concerns, the IRS recently embarked on a comprehensive strategy for preventing, detecting and resolving identity theft cases as soon as possible. The tax agency has also stepped up its internal reviews to spot false tax returns before tax refunds are issued and vowed to continue to help victims of identity theft refund schemes.

Anyone who believes that his or her personal tax information has been stolen and is being used for illegal purposes has been advised to immediately contact the IRS Identity Protection Specialized Unit. For more information, visit the IRS website at www.irs.gov/identitytheft

As part of its identity theft strategy, the IRS recently announced that it is initiating a new law enforcement assistance program. The undertaking is designed to aid local investigations and prosecutions of specific identity theft cases. Under a pilot program, the IRS will be working with law enforcement units to coordinate anti-theft efforts throughout Florida, the State with the highest per capita rate of reported identity theft complaints (followed by Georgia and California).

State and local law enforcement officials who have evidence of identity theft involving fraudulently filed federal tax returns will ask identity theft victims to complete a special IRS disclosure form. The form was created by the IRS solely for this purpose. The victims must give their permission for the IRS to provide law enforcement with tax returns using their Social Security numbers. The law enforcement officials will then contact those individuals to request and secure consent for disclosure of the records. In some cases, the IRS will provide assistance with locating taxpayers and soliciting their consent.

Law enforcement officials will forward the form to the Criminal Investigation Division of the IRS, along with a copy of the police report and the IRS Identity Theft Affidavit, if available. Identity theft victims should still submit the original copy of the affidavit in accordance with the instructions on the back of the form.

While the pilot program is in operation, the IRS will process the disclosure forms and send the information to the requesting law enforcement officer. These documents will not be sent directly to taxpayers. However, in a press release, the IRS stated it will continue to work directly with taxpayers to resolve their tax issues.

At the conclusion of the program, the IRS will assess the results before deciding on how to proceed. This is one of several IRS initiatives designed to thwart identity theft. It is also implementing new procedures for handling tax returns, new filters to detect fraud, new partnering agreements with stakeholders and a renewed commitment to investigate the criminals who perpetrate these crimes. If you want to read more details about IRS activities on this issue, consult the Taxpayer Guide to Identity Theft or the IRS Identity Theft Protection page on its website.

If you have concerns about your situation, contact your tax adviser.

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