Over the past several years, the IRS actions against tax identity fraud were successful in driving down the rate of tax fraud. Then the COVID-19 pandemic happened. The IRS extended due dates and become bogged down trying to process returns while keeping their employees safe. Additionally, U.S. stimulus payments were administered as tax refunds and the Federal government enhanced state unemployment benefits. Identity thieves had more financial incentive than ever before to commit tax and benefits fraud.
The impact was immediate: By the end of February 2020, tax return identity theft was already up 751% year over year. By June, 892,777 tax returns had been flagged by the IRS for potential identity theft. But there’s good news—you can take steps now to protect your identity as well as any tax refunds or stimulus payments due to you in 2021.
How tax return fraud happens
Tax-related identity theft can leave taxpayers bewildered and frustrated, but the mechanics of it are fairly simple. First, identity thieves obtain sensitive information about you including your name, address, and personal tax identification number. They can either buy the information from criminal sources or trick you into giving it to them through phishing or phone scams. Then they use it to file a tax return using a false address or post office box and wait for the refund check to roll in.
Warning signs of tax return fraud
There are several warning signs that indicate you may be a victim of tax return fraud:
- The IRS or other taxing authority rejects your attempt to file your tax return.
- The taxing authority requests verification of your identity, indicating something may be amiss.
- Income is reported by two or more employers, most likely because someone else has used your tax identification number to gain employment. Your return could be flagged for failing to pay sufficient taxes on wages or to report all wages. 
Take advantage of the new IRS Identity Protection PIN
In January, the IRS expanded the Identity Protection PIN Opt-In Program to all taxpayers who can verify their identities. The Identity Protection PIN (IP PIN) is a six-digit code you establish with the IRS that is only known by the agency and you. The IP PIN provides a good way to lock out identity thieves and prevent them from filing fraudulent tax returns using your personal information. The IP PIN is valid for one calendar year, so mark your calendar to obtain a new one at the start of each year.
Resolve tax-related identity theft
If you discover you have become a victim, follow these steps:
- Contact your taxing authority and fill out identity theft paperwork.
- File your correct return using the instructions they provide you.
- Contact the credit bureaus and place a fraud alert on your account.
- Respond promptly to all correspondence from your taxing authority.
- Keep excellent records of all of your correspondence and filings.
- Add a credit monitoring and identity protection service to identify any further identity theft or fraud in other areas of your life.
We have partnered with Cyberscout to offer comprehensive identity management services. If you detect suspicious activity or would like to proactively protect your identity, contact us to be connected to a Cyberscout fraud expert.
 “Interim Results of the 2020 Filing Season,” Treasury Inspector General for Tax Administration, April 7, 2020.
 “Interim Results of the 2020 Filing Season: Effect of COVID-19 Shutdown on Tax Processing and Customer Service Operations and Assessment of Efforts to Implement Legislative Provisions,” Treasury Inspector General for Tax Administration, June 30, 2020.
 “Taxpayer Guide to Identity Theft,” IRS website, page updated October 22, 2019.
 “All taxpayers now eligible for Identity Protection PINs,” IRS, January 12, 2021.