Why you should file your taxes ASAP
During the first five months of 2017, more than 100,000 people received unwelcome news: Someone else had filed a tax return using their name and Social Security number.
Fraudulent tax returns have been declining in recent years thanks to enhanced security measures deployed by the government. "They are still not ahead of it, [but] the IRS is getting their arms around [it] now," says Lane Mullinax, an attorney and certified financial planner on the Q&A platform JustAnswer.
However, 2018 may pose a new test for the government's ability to weed out fraudulent returns. More than 145 million Americans had their Social Security numbers stolen when credit bureau Equifax was hacked last year.
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It's not the first data breach to affect millions, but it has the potential to cause greater damage. "What made this so different was the depth of the information retrieved," says Ray Gandy, director of IT risk and security for accounting firm CBIZ MHM in Boston. Not only did criminals access Social Security numbers, but they also retrieved other valuable demographic information.
As a result, taxpayers may be at heightened risk for tax identity theft this year. To avoid being a victim, be prepared to file returns as early as possible.
Everyone is potentially a victim. Even those who haven't been directly affected by the Equifax breach could be a victim of tax identity theft. Prior security breaches have occurred at Target, Yahoo and LinkedIn, among other places. "You can just assume your information has been compromised," says Paul Gevertzman, partner with accounting firm Anchin, Block and Anchin in New York City.
What's more, companies aren't always forthcoming with information about data breaches or don't understand the extent of their data loss. "It's almost impossible to know where this thing starts and stops," says Richard W. Paul, president of financial advisory firm Richard W. Paul & Associates in Novi, Michigan. He points to the fact that it took four years before the full extent of a 2012 breach at LinkedIn was revealed.
Filing first is the best defense. In response to its data breach, Equifax has offered free credit monitoring to customers. However, you should not assume monitoring services will prevent identity theft. "These programs are not going to help you," says Paul Joseph, an attorney and CPA with the firm Joseph and Joseph in Williamston, Michigan. While they may alert you to new credit inquiries and accounts, they can't and don't monitor for fraudulent tax activity.
Instead, the best way to avoid being a victim of tax identity theft is to file your return as soon as possible. "Hopefully you jump through the window before someone pretends to be you," Mullinax says.
Fraudsters use stolen Social Security numbers to create phony returns and file them early in the tax season. If they aren't flagged for review by the IRS, the return is processed and a refund issued. Then, when the legitimate taxpayer tries to file his or her return, the system rejects it. The result can be a protracted process in which an affidavit must be completed, supporting documentation provided and a paper return filed.
[See: 10 Tax Breaks for People Over 50.]
Other strategies to protect yourself. Not everyone can file early. Some taxpayers may have to wait for documentation or otherwise be delayed in submitting their return. "There are two schools of thought there," Gandy says. One option is to use estimated numbers rather than waiting for tax forms. "You could file early and then amend."
However, that can be a less than ideal solution. "I personally don't like to have to amend my return," Gevertzman says. The other option is to wait to file, but keep close tabs on your tax record in the meantime. The IRS offers a transcript service which lets taxpayers review activity on their record. This method doesn't prevent identity theft, but it helps taxpayers proactively address problems rather than finding out about fraud when filing their return.
Some taxpayers also have the option of using an identity protection PIN which offers another layer of security against fraud. "Typically, you have to be compromised to get the PIN," Joseph says. In other words, the federal government only issues PINs to those who have already been a victim of tax identity theft. However, residents of Florida, Georgia and the District of Columbia are eligible for a PIN even if they aren't identity theft victims.
For those who are eligible, a PIN can be a good way to deter fraudulent returns. For everyone else, filing as early as possible remains one of the best ways to avoid being a victim of tax identity theft.
Copyright 2017 U.S. News & World Report