Income tax identity theft by which identity thieves file an income tax return using the Social Security number of their victim and get a substantial income tax refund based on a counterfeit W-2 is a huge problem that is only getting worse. It cost the federal government and, as a result, we the taxpayers 6.5 billion dollars in 2013. Recently, however, the IRS announced a new cooperative effort between the IRS, state tax administrators and private tax preparation leaders. Included among the steps being taken are review by the IRS of the IP address of computers filing income tax returns to identify computers filing multiple returns and reviewing the time it takes to complete an electronic income tax return which can also help identify fraudulent returns since completing a fraudulent return generally takes less time than a legitimate return. In addition, income tax preparation software companies will be using enhanced validation protocols including increased use of security questions.
However, all of these steps which are expected to cost taxpayers an additional 281 million dollars to implement totally miss the point. The easiest and simplest way to dramatically reduce income tax identity theft still is not being done by Congress, namely changing the laws regarding employers filing of W-2s. Under present law, for the upcoming tax filing season, employers must file W-2s with the federal government by February 29th if they file paper W-2s and as late as March 31st if they file, as so many do, electronically. Unfortunately Congress in its infinite wisdom requires these W-2s to be filed with the Social Security Administration (SSA) by those dates. The SSA does not send the W-2s to the IRS until July so the IRS does not get around to matching the W-2s filed by employers with those filed by individual taxpayers with their income tax returns until months after the IRS has already sent a refund based on the W-2 filed by the taxpayer or identity thief. In order to dramatically reduce income tax identity theft, all Congress has to do is merely require employers to file W-2s with the IRS instead of waiting for the SSA to send them to the IRS. It also would make much more sense than Congress appears to have to require the IRS to match those employer filed W-2s with those filed by individual taxpayers BEFORE sending out a refund in order to easily identify counterfeit W-2s. For years Congress has been advised to make these simple changes, but it still fails to do so.
As for we as individual taxpayers, what can we do to reduce our chances of becoming a victim of identity theft? Of course, protecting the privacy of your Social Security number is extremely important, but with so many data breaches at companies that have this information, this is somewhat outside of our control. However, what we can do is to file our income tax returns as early as possible. In order for an identity thief to make you a victim of income tax identity theft, he needs to file an income tax return using your Social Security number before you file a return. If it is filed after you have filed a return, it is too late for the identity thief to claim a refund using your information.