If you were among the millions of Americans whose information was stolen in the Equifax data breach, you'll need to protect yourself come tax time next year. Tax return fraud is a perennial problem, but with so many Social Security numbers stolen in the recent hack, it's likely that next year will be particularly bad for this type of fraud.
How tax return fraud works
If a fraudster has your name and Social Security number, he or she can file a tax return in your name and adjust the figures to make it look like the IRS owes you a huge refund. Then the fraudster can list his or her bank account as the destination for said refund. Once the refund arrives, the fraudster empties out the bank account and takes off.
Naturally, that leaves you holding the bag when the IRS comes calling to ask about the inaccurate tax return the fraudster filed for you. The resulting chaos can take months to resolve, which is particularly hard on taxpayers who were expecting (and counting on) a large tax refund.
File early to prevent fraud
The most effective way to protect yourself from tax return fraud is to file your return as early in the year as humanly possible. If you can get your legitimate return filed before a fraudster can file one for you, then the fraudster's return will automatically be rejected by the IRS.
In order to file your return early in the tax season, it's a good idea to start preparing it well in advance. You won't be able to complete the return until you have all the necessary documentation, such as the W-2 from your employer and the various 1099s from your bank, brokerage, mortgage lender, etc. However, if you start working on the return with the information you have now, you can speed through the last bits as soon as you get all your tax documents in the mail.
Check your tax account
Just as monitoring your credit report can help you catch signs of identity theft early, checking your tax account can also help you to respond quickly if a fraudster manages to sneak a tax return in for you. You can sign up to view your tax account information on the IRS website, but be warned: The agency requires you to provide an exhaustive amount of personal information to sign up for this service, so just getting enrolled can be quite a headache. However, once you make it through the enrollment process, you'll be able to see your tax transcript any time you choose.
Minimize the damage
Another smart move you can make to protect yourself is to adjust your employer's withholding rate so that you won't receive a large refund. If you're not expecting a big refund, then having to wait months to resolve a tax fraud situation won't be such a disaster. Speak with your HR representative about filling out a new W-4 form to reduce the taxes that your employer is withholding from your paycheck; ideally, you'll want to adjust your withholding so that you'll end up both owing and owed nothing, or receive only a small refund from the IRS. It may be a bit disappointing to lose that big annual tax refund, but remember, if your employer is withholding less, that means you're getting more money in every paycheck. Plus, you'll get to spend or invest the extra money right away, instead of having the IRS sit on it for months (without paying you so much as a penny of interest).