Beware! Identity thieves are targeting your tax refund

Tax identity theft is costing the government billions of dollars and entangling taxpayers in untold administrative hassle

If you've been putting off filing your federal tax return, here's news that might send you scrambling for a Form 1040: The IRS sees a growing problem with tax identity theft, where thieves are using stolen Social Security numbers to file bogus tax returns and collect unwarranted refunds.

According to a Huffington Post report, "the number of IRS ID theft investigations tripled in 2012 and is focused on high-risk cities such as Miami, New York, Atlanta, San Francisco, Chicago and Los Angeles." An audit conducted by the Treasury inspector general last July estimated that the IRS could pay out as much as $21 billion for fraudulent refunds over the next five years.

Victims often don't find out their IDs have been stolen until their legitimate returns are rejected. Straightening out those tax records can be a significant administrative hassle -- this is the IRS, after all. Acting IRS Commissioner Steven T. Miller said last month that taxpayers whose IDs have been stolen often must wait months to get their rightful refunds. "There's a current backlog of 300,000 cases and an average wait time of 180 days for a resolution," Miller said.

To deal with tax identity theft, the IRS last year doubled to 3,000 the number of staffers working on the problem, and another 35,000 employees have been trained to aid victims and help taxpayers recognize identity theft indicators. According to a USA Today report, the IRS resolved more than 500,000 identity theft cases during the last calendar year.

There seems to be some disagreement on whether e-filing puts you at greater risk. Fox Business quotes Denis G. Kelly, president of IDCuffs.com, an identity theft prevention and protection company: "For the most part, there is not substantially more risk for e-filing. In fact, when the check-clearing process was changed from physical checks to digital checks, the percentage of fraud decreased. The consensus for this decrease is the number of eyes that see checks in the process was significantly reduced."

However, a report from CBS Dallas-Fort Worth claims "tax identity theft has skyrocketed mainly because of the IRS push for taxpayers to file their income tax returns electronically and have refunds issued by direct deposit. But often thieves open bank accounts, receive refunds via direct deposit, and close accounts before the theft has been detected." In fact, a recent audit showed the IRS sent 590 refunds, totaling nearly $1 million, to one bank account. You'd think that would've raised a few red flags.

What security experts do agree on is the need for basic security precautions: Guard your Social Security number and be cautious about giving it out; don't fall for phishing scams -- the IRS does not communicate with taxpayers via email or phone; and keep your computer's spyware and firewall up to date.

It also can't hurt to beat potential tax identity thieves to the punch by submitting your return early.

If you suspect you have been the victim of identity theft, you might want to consider filing a Form 14039 Identity Theft Affidavit (PDF) and applying to the IRS for an identity protection PINs (PDF). The five-digit PIN, which can be used to verify that you are the rightful owner of a SSN, is good for one year and is used only to file a tax return.

For more security tips from the IRS, check out this video:

This article, "Beware! Identity thieves are targeting your tax refund," was originally published at InfoWorld.com. Get the first word on what the important tech news really means with the InfoWorld Tech Watch blog. For the latest business technology news, follow InfoWorld.com on Twitter.

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