Taxpayer ID Fraud: Are Your Clients Protected?

tax identity theft fraud

Sometimes, accountants have to break bad news to clients. It’s bad enough when it’s a legitimate business concern, but imagine having to tell them they’re victims of tax return identity theft — that someone has already filed your clients’ tax returns and collected their refunds, and recovery will be no easy matter.

The ability to file an electronic return has opened up a whole new front in the war against identity theft. Using your clients’ personal details, including their Social Security numbers, fraudsters can file fake returns and have the refunds deposited straight into their own bank accounts. Victims can also be left on the hook owing more taxes when identity thieves list fake dependents and write-offs.

Often, taxpayer ID fraud isn’t detected until you attempt to file a genuine return for your client or when they find themselves subject to an audit. The IRS takes an average of 312 days to resolve a typical case of such fraud. For the million-plus taxpayers victimized by this high-tech crime, that can be a distressingly long time.

How can you protect your clients from taxpayer ID fraud?

Prevention is better than a cure, and this is certainly true in relation to tax return identity theft. Your duty is to educate your clients about risk factors and emphasize how they can proactively protect against fraud.

Here are some basic rules that everyone can follow, including:

  • Always file early. The sooner your clients send their tax returns to the IRS, the less opportunity identity thieves have to file in their name.
  • Be careful with your Social Security number. Advise clients not to carry their Social Security number on their person, such as in their purses or wallets. They should also refuse to provide their number to a business unless the business has a good reason for requesting it.
  • Take online security seriously. Hackers can steal your information in a number of common ways: through viruses on your computer or mobile device, through phishing websites and by guessing weak passwords. Web security is as important as physical security, and failing to protect your online information is like forgetting to lock your front door.
  • Perform regular credit checks. Credit checks offer a degree of antifraud protection, and they can show if someone has used your client’s details for any financial activities such as applying for credit or opening a bank account. If your client has suffered this type of fraud, they may also be susceptible to taxpayer ID fraud.

What if your client is a victim of taxpayer ID fraud?

Identity fraud is a felony, and clients should immediately contact local police, as well as the Federal Trade Commission's toll-free identity theft hotline at 1-877-438-4338.

If they’re not already getting regular credit checks, advise clients to alert the major credit agencies. A poor credit score, even if due to taxpayer ID fraud, can have a profound impact on a person’s life, including lost job opportunities and high-interest loans.

To get your client’s tax affairs back on track, they will need to complete IRS Form 14039, also known as the Identity Theft Affidavit. The IRS then begins the process of untangling the fraudulent records from the genuine ones. The length of time this takes will vary depending on the nature of the fraud and the complexity of your client’s financial affairs. Your client will likely need your help in providing relevant documentation in a timely manner and dealing with follow-up queries as they arrive.

With tax season around the corner, be sure to read our tips for surviving crunch time.

The advice provided on this website is general advice only. The information is not intended to be and does not constitute financial advice you should offer your clients or that one should take without first consulting with their financial advisor.