Here's the good news: Tax season is upon us, and millions of taxpayers can eagerly await their income tax refunds once they've filed their returns. Unfortunately, there's some bad news: Identity theft and tax-refund fraud are on the rise, and some crook might nab your refund before you do, causing a lot of headaches and possibly some financial stress. You can take steps to avoid being victimized, though.
First, though, know that it's not an extremely remote possibility that you'll be a victim of tax-refund fraud. It's now the biggest tax scam going; the IRS estimates that it sent nearly 3 million refunds to fraudsters, costing us taxpayers more than $5 billion.
Here's how it works: With just a few pieces of information on you, such as your birthday and Social Security number, someone can steal your identity and file a return with false information on it, including their address, not yours. Then your refund gets sent to the culprit. And when you file your return, you learn that your refund has already been issued. The bad guys have plenty of ways to get your personal information, such as "phishing" for information via phone calls or emails. You need to be vigilant and cautious.
To make matters worse, years of budget cuts have reduced the IRS' workforce, putting pressure on its ability to fight this scourge. It's taking the threat seriously, and it prevented nearly 15 million fraudulent refunds from being claimed between 2011 and late 2013.
The earlier you file your return, the earlier you'll get your refund -- and the less time fraudsters will have to impersonate you and grab your money. The IRS begins accepting electronically filed returns on Jan. 20 and begins processing paper ones then, too. It wants people to know that electronic filing is "the most accurate way to file a tax return and the fastest way to get a refund."
Once the IRS has your return, it aims to issue a refund (if applicable) in fewer than 21 days. However, the IRS Commissioner recently announced that because of budget cuts and reduced staffing, refunds might be delayed by a week or more. Impatient folks can check on the status of application processing and refunds via the IRS' IRS2Go mobile app and its online Where's My Refund? tool.
When it comes to receiving your income tax refund, you have some options. You can have it mailed to you as a check or you can have it direct-deposited. In fact, you can have it split between two or three bank accounts, if you want, with direct deposits to each. You can specify that it be deposited into a single account on the tax return itself, or you can use IRS Form 8888 Allocation of Refund to split it.
The upside of having your refund direct-deposited is that you will get your money sooner, as you won't have to take your check to the bank -- and it also won't get lost in the mail, misplaced, or (gulp) get stolen.
If you're paying someone to prepare your tax return, make sure it's someone you trust. Most tax pros are legitimate and not trying to cheat you, but a few have hung their shingle out in order to get your business -- and your personal information, and your income tax refund. Know that you are ultimately and legally responsible for your return, because you sign it.
Of course, you can't always take every preventive measure. The worst that will happen is that you will be a victim of income tax refund fraud. But that's not the end of the world, though it can be a significant hassle. If someone swiped your refund, that doesn't mean you'll never get it. The IRS will work with you to resolve the problem, but it notes that a typical case can take six months to get resolved. It's working on speeding things up, but that's hard when its budget and staff keep shrinking.
Don't let this threat keep you up at night, but do take whatever precautions you can to reduce your chances of getting hit by this scam.
Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. Nor does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.