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This IRS Problem Has Grown So Large, You'd Be Foolish to Ignore It

In my youth I was pretty forgetful, and I considered myself downright fearless and brazen when it came to the possibility that my possessions might be stolen right out from under me. I frequently forgot to lock the front door to my house and often left my car unlocked, too. Luckily, I was never the victim of a theft, although that would have made getting rid of my first car a lot easier, come to think of it.

Unfortunately, for many others, theft is becoming all too common. But theft, as we know, has evolved with the dawn of the Internet from simply stealing your possessions to stealing your identity, which has proved to be a much more lucrative venture for would-be thieves. By stealing your name, address, Social Security number, and other vital information identity thieves are simply playing the numbers game come tax time. Even if 90% of their efforts are stopped by the IRS, the remaining 10% piece of the pie is more than enough to make it lucrative for thieves to continue with their scheme.

If you don't think this is a serious problem, then have a gander at these statistics compiled by the Boston Globe after combing through data from the Treasury Inspector General for Tax Administration.

Source: Treasury Inspector General for Tax Administration.
*2013 figures are through June 29, 2013. 

The IRS has a very big problem on its hands
In 2010 there were some 270,518 taxpayers affected by identity theft. In 2011, this figure more than doubled to 641,052. In 2012, it basically doubled again to 1.2 million. And through just the first half of 2013 there were 1.63 million taxpayers affected by identity theft, lending credence to the possibility that these figures could double for a third straight year.

The really concerning aspect about identity theft is that literally no one is safe. As the Boston Globe's report notes, in 2011 potentially fraudulent returns were filed "using Social Security numbers of 1,451 children under 14 years, 19,102 dead people, 37,249 prisoners, and 753,000 people whose income level did not require a tax return."

With so few checks and balances in place, and just 3,000 IRS agents exclusively pledged to preventing identity theft (although more than 35,000 employees have been trained to identify identity theft, per the IRS), the average identity theft case takes a whopping 312 days to sort out. For you math-o-phobes, that's a tad over 10 months!

Source: Adam Thomas, Flickr.

Part of the problem is that we make it very tempting for would-be identity thieves to file fraudulent returns under other people's identity. Citizens whose income is too low to need to file a tax return rarely keep up on their account or credit history, allowing identity thieves to continue filing false tax returns in the hope of garnering Earned Income Tax Credit payments. According to ABC News earlier this month via the IRS' Inspector General, somewhere between $13.3 billion and $15.6 billion -- or a quarter of all EITC payments made in 2013 -- were fraudulent. This doesn't mean it was all identity theft per se, but I'd suspect a good chunk likely were. 

Source: Don Hankins, Flickr.

Access to files of recently deceased individuals is another way that identity thieves are able to try to pull one over on the IRS. With Social Security numbers on file, it's a practical invitation for thieves to try their luck.

Added together, these figures are what prompted Danny Werfel, principal deputy commissioner of the IRS, to proclaim that "refund fraud caused by identity theft is one of the biggest challenges facing the IRS today." 

What you can do to stop identity theft
If there is a ray of hope here, it's that you, the taxpayer, can take steps now to reduce your chances of becoming an identity theft victim. While there's no bulletproof way to secure yourself, here are some suggestions straight from the IRS that may help improve your chances of keeping your identity safe:

  • Don't carry your Social Security card with you. One of the easiest ways for criminals to get their hands on vital information is if you leave it within arm's reach in your wallet or purse. Keep sensitive documents containing your Social Security card or individual taxpayer identification number locked up safely at home.
  • Check your credit report regularly. According to the IRS, you should check your credit report at least once a year. The good news here is that you can actually get a free report from each of the three major credit bureaus once a year, so use it!
  • Protect your online information. Although you should be doing this already, the IRS strongly suggests setting up firewalls to protect your network, using antivirus software to protect your computers, and frequently changing the password of important accounts to make it more difficult for Internet-based hackers to access your information.
  • Avoid giving out personal information over the phone. Sometimes the oldest trick in the book is to pretend to be a government agent and to scam unsuspected taxpayers into giving out their personal info over the phone. The general rule here is that unless you initiated the call, it's probably best not to transmit that data over the phone.

Source: Joi Ito, Flickr.

Of course, there are a number of other things you can consider as well. Credit bureau TransUnion suggests being especially careful with your trash. Your trash is a thief's treasure, and intact banking statements and other bills could serve as the perfect fodder to allow them to take your identity.

Another option is to beef up your external security by potentially turning to a company such as LifeLock (NYSE: LOCK  ) , which specializes in protecting an individuals' identity against a number of frauds, including tax fraud. Now to be clear, you can take a lot of steps that LifeLock will take to protect your identity for free; however, the ease of the service and putting it in someone's hands clearly speaks to the desire for convenience.

Whatever you do, do something
The ultimate point here is that identity theft is no longer something that affects "the other person." With 1.63 million taxpayers coping with identity theft through just the first six months of 2013, we're looking at a scenario where more than one in 100 filers could be a victim. You need to be proactive about protecting your personal and financial information, because the damaging aftermath of straightening everything out makes even the simplest things, such as applying for a loan to buy a house or refinancing, practically impossible.

Let these figures serve as your wake-up call if you are now like I was nearly 20 years ago.

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Read/Post Comments (24) | Recommend This Article (37)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 26, 2014, at 10:41 AM, drdave16666 wrote:

    Anyone can go to the social security death index and pull thousands of social security numbers right from their list. It is a virtual gold mine for some in order to file false tax returns...

  • Report this Comment On May 26, 2014, at 10:50 AM, TelsaRowe wrote:

    The money the irs had stolen would have gone to worthless projects anyway. The tax code is a mess and irs employees like most government employees are able bodied welfare recipients.

  • Report this Comment On May 26, 2014, at 10:51 AM, MRJR wrote:

    Surprise, it is administered by the Federal Govt. - the epic illustration of theft and leechdom !

  • Report this Comment On May 26, 2014, at 10:51 AM, foolerest wrote:

    Seriously? All this blah blah blah about identity theft when the IRS and the Federal Reserve and the international bankers are the real problem?

    Not one penny of IRS tax-dollars goes towards any service for the people. Do some research.....

    Search supremelaw org sls 31answers

    Search what is taxed irs agent whistleblowers

    Search xat org moneyhistory

  • Report this Comment On May 26, 2014, at 10:58 AM, c0wpatty wrote:

    So why can't the IRS run a crosscheck against the SS numbers on the death index with every return showing a refund?

  • Report this Comment On May 26, 2014, at 11:02 AM, GomerWumphf wrote:

    It is a good idea to put a credit freeze on accounts of children and anyone who are not likely to need new credit especially the medically infirm (note: Medicare ID cards have social security numbers on them).

    This should be done at the three credit reporting companies TransUnion, Experian, and Equifax. It will block anyone from opening accounts or getting loans in the name of your child or loved one. Credit freezes can be removed and reinstated easily if new accounts are needed.

  • Report this Comment On May 26, 2014, at 11:04 AM, grandude wrote:

    OK please tell me if this right. If the Income tax is replaced with a merchant collected and paid federal sales/consumption tax the IRS problem would be eliminated and the need for any government barnacle other than corporate tax collectors. This would be a net gain against the deficit.And the need for filing oversight would wither away and die. PRAISE JESUS!!

  • Report this Comment On May 26, 2014, at 11:11 AM, frankiev wrote:

    How come nobody mentions their Medicare card. It has your Social Security number on it as your identification. That is also another way to steal your identity. Maybe they should change that system also.

  • Report this Comment On May 26, 2014, at 11:32 AM, johnnya2 wrote:

    @ MRJR,

    You said "Surprise, it is administered by the Federal Govt. - the epic illustration of theft and leechdom !"

    Interesting. What abotu Target? A PRIVATE enterprise had about 110 million people compromised.

    Neiman Marcus, JC Pennny, Michaels have all had the same issue. In fact, since the IRS deals with FAR more customers than any of these organizations, I would suggest they are doing better than private industry in controlling the problem.

  • Report this Comment On May 26, 2014, at 11:48 AM, screwed1twice wrote:

    In 1998 John Black with an office in 75116, stole

    $8500.00 from my wife and myself. I called the IRS and they were rude telling me it was my problem. Let me see, fraud, theft of government money, wire fraud is MY PROBLEM!!!!!! As a veteran I guess My family gets screwed again. You wonder why militias within our country are gaining power. I'm tired. Our Government has taken your rights away. When the IRS won't help

    return my money, that the IRS so willing gave to a thief my money. I give up. This is just another step toward a revolution which I will be glad to join!

  • Report this Comment On May 26, 2014, at 12:14 PM, VegasSmitty wrote:

    The IRS takes our money and then Obama sends it to our enemies overseas. I don't think the IRS is our real problem.

  • Report this Comment On May 26, 2014, at 1:01 PM, Taz wrote:

    If the USA was to scrap the individual income tax in favor of a national sales tax not only would revenue increase because people couldn't duck the tax as easily but they couldn't use the feds information to steal identities.

  • Report this Comment On May 26, 2014, at 1:41 PM, taxpayer56 wrote:

    One way to solve alot of this problem is eliminate the earned income tax credit. The MOST anyone should be able to recieve back is the amount they paid IN. This stupid welfare program allows thieves and illegal aliens to steal the tax payers blind.

  • Report this Comment On May 26, 2014, at 2:06 PM, heroldpohl wrote:

    I am a dead person. I just found out my identity has been stolen. You know what? I don't give a damn. I will not take any of this advice. And, incidentally, Hell is not as bad as they tell you.

  • Report this Comment On May 26, 2014, at 3:04 PM, honestyproject wrote:

    I'm dealing with identity theft problems with the IRS now. It pissed me off that they didn't notify me of the fact until I called them to find out what was taking my tax return so long to arrive. Then they told "me" that they were waiting for me to call "them", when I made the realization and that they only respond 20 days after you have filed your taxes. In the mean time someone has been opening accounts with my identity when the issue could have been resolved. They already had my banking information because they were deducting money from my account for what I owed them from previous years. Switch to a VAT/sales tax. The VAT would be on luxury items. The sales tax would be on everything else, including high frequency trading for individuals and companies. Outlaw all offshore accounts for companies and individuals. Read about Government Sanctioned Racketeering!

  • Report this Comment On May 26, 2014, at 3:45 PM, reddieeddie wrote:

    The irs is nothing but hell in a hand-basket. Who is stupid enough to tell the consuming public that they are being swindled in the first place? It tells the world just how stupid you are to allow such behavior on your part. The irs is filled with propaganda to the max. I never believe anything they have to say. Fraud lies that is all the irs is about these days.

  • Report this Comment On May 26, 2014, at 4:12 PM, greyhound44 wrote:

    The largest problems the IRS faces is that it is totally incompetent and even exists !!!

  • Report this Comment On May 26, 2014, at 4:23 PM, Disgustedman wrote:

    This is why I have 5 deductions. I ALWAYS owe and they cannot steal from me...Now from the govt that's a different story.

    Oh and to those "Helpful hints"

    Don't carry your Social Security card with you.

    Yet you need it applying for work.

    Check your credit report regularly.

    Unless you are in the Credit reporting industry, you cannot make heads or tails for the reports. The free ones suck.

    Protect your online information.

    Too many stupid people out online...Can't stop them....You cannot stop them.

    Avoid giving out personal information over the phone.

    Too many stupid people with free phones...Can't stop them from calling, you cannot stop them from giving the info away....

  • Report this Comment On May 26, 2014, at 5:18 PM, TelsaRowe wrote:

    Every ssn should have an online irs account associated with it. It should show all tax, work and filing information that the owner of said ssn should be able to log in and view 365 days a year. How f*****g hard is this crap really? Instead we have an incompetent irs, a disastrous tax code, a messy paper based system, a 1-800 number thats useless, delays, dozens of tax filing agencies, fake tax return websites etc... this all on top of a majority percentage of the country confused about taxes and returns to begin with. F*****g ridiculous.

  • Report this Comment On May 26, 2014, at 6:09 PM, Igotnothing wrote:

    Yeah, ok, my estranged husband work for the federal government, they allowed him to use a different variation of his name, I was dumb enough to let him handle all the business matters. He always said it was a mistake with his name, until he moved out, and I found a wealth of information, including social security number to go with that name variation. He was also doing taxes in that name, after I found out, I stopped signing any tax forms relating to him, I was a homemaker, I was unaware that he was involved in so much stuff, I'm not sure what I'm going to do with the boxes of evidence I found, I keep it locked away at somewhere else, because I am afraid, I've already consulted a prominent attorney, he told me to be very careful, if all else fails, I will simply take it to the news media, it will be a very big story, this has gone under the radar for years, and they don't know about it. I will say that if you know someone with a UPS of Fed-Ex store, you can change addresses at will, and create false addresses, how this can happen? They have access to the postal database! I know, I lived in my residence for over 20 years, someone was determined to change the format of my address, they could not figure it out, it took me 2 years to do it, I was always curious as to why my estranged husband would get mail regarding postage meters, saved all that too, as far as I'm concerned, what do you do, when its your spouse? I've done everything possible to safeguard my personal info, had to go to the bank some months ago, why would they have on my account which they identified with my driver's license number, and a utility bill, a different birthday? Well, if your husband doesn't want to be identified with you, you have insiders change all the info possible, and other stuff to involved to share on here, by the way, have been married 40years!

  • Report this Comment On May 26, 2014, at 8:41 PM, jrc1066 wrote:

    Ah yes! The IRS---The ones who are going to administer our healthcare. Makes you feel all warm and fuzzy, no?

  • Report this Comment On May 26, 2014, at 8:50 PM, djsloan5854 wrote:

    When the irs jumped me for fraud someone else committed in my name they forced me to lie cheat and steal to beat them. I had no choice. But it wasn't hard to do, the ones I dealt with were stupid and very lazy. Easy to rip them off if i wanted to. the last thing i told them was if they wanted anything from me in the future , bring plenty of help and all your guns. Never filed taxes again and don't give a damn if they see this or not. I'm so old and worn out from 45 years of work i would love to take some of them with me. Revolution is the only hope America has now. History teaches once a Gov. is corrupted you can't fix it. You have to cut off their heads and hang them , things like that. REVOLUTION! Revolution now!

  • Report this Comment On May 27, 2014, at 1:58 AM, MrDrew2u wrote:

    Why does this story hit me as if it is one of the , first steps in getting us to use ID implants . For one we all know how the IRS has been less then honest over the last 20 years and how our government and leaders fear the future of controlling our every day lives , in the name of security . As the NSA still tracks us thru our e-mails and cell phones we as free born Americans should not let these things of the recent past go by the wayside . Let us not be the fools that look the other way , for our children's loves and futures depended on it and us .

  • Report this Comment On May 30, 2014, at 7:18 PM, LandmarkTaxGroup wrote:

    Kudos to the author for a thorough and well-researched article on this subject. As a tax practitioner, I've had several clients that had their identities stolen and/or false tax returns filed in their name. In most instances, taxpayers first find out there's a problem when the IRS rejects their original tax return.

    Many of these schemes are perpetrated by inmates with help from outside accomplices as well as unlicensed tax preparers that set up shop during tax season. Taxpayer would be well-served to follow the advice in the article.

    Michael Raanan, MBA, EA


    Former IRS Officer

    Landmark Tax Group

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Sean Williams

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and in investment planning topics. You'll usually find him writing about Obamacare, marijuana, developing drugs, diagnostics, and medical devices, Social Security, taxes, or any number of other macroeconomic issues.

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