Find out how to Avoid IRS Trouble Because of Identity Theft

In September 21, 2012, an Arizona woman was sentenced to three years in prison for identity theft, and ordered to pay nearly $400,000 in restitution.  She had used stolen identities to file 180 tax returns.   She tried to conceal her tracks by filing the tax returns electronically using the unsecured wireless networks of her neighbors.  Then she recruited her friends and had the refunds (within the kind of prepaid debit cards) sent to their addresses.

And that, my friends, is the anatomy of an identity theft.

The above example was provided in testimony by an IRS official before the home Oversight and Government Reform Committee.

As you complete your tax returns this tax season, identity theft could be the last item to your mind — but try to be conscious of the possible risks.

It’s bad enough if someone steals your identify or your business’s identity, and racks up charges to your mastercards or takes out loans for your name.  But you’ll find yourself in a pickle with the IRS, too, potentially incurring unnecessary tax liability. Then you’d have a tax mess to wash up, including  extra expenses to pay an attorney to symbolize your interests.

You see, income you didn’t earn could possibly be reported to the IRS.  Who’s going to pay the taxes on that income you never received, however the fraudster got?

Or a second (incorrect) tax return can be filed for you and your enterprise.  If you’re due a tax refund, it can be delayed or never get to you, as it finally ends up elsewhere.

And in the event you and your loved ones receive any Federal benefits, those may be reduced, because another government agency may get information from the IRS suggesting your income went up (when it really didn’t).

The IRS says it has 3,000 employees engaged on identity theft cases.

It’s easy to hate the IRS, however the agency is needed to be a watchdog of taxpayer funds.  If refunds are paid out in error resulting from fraud, ultimately those are losses the yank taxpayer could have to eat.  So if the IRS can reduce on losses from identity theft, it benefits everyone (except the criminals!).

Take these steps to give protection to yourself and your online business from identity theft — before or after the actual fact:

Protect and Avoid

  • Perform a credit check on yourself and what you are promoting once or more a year to peer if unauthorized loans or charge cards has been taken out.
  • Protect your financial information, especially your social security number or EIN number.  Don’t give it out over the telephone or in an email unless you’re absolutely sure there’s a sound reason.
  • Protect your computers and mobile devices (personal and corporate-issued) from phishing and malware. Otherwise, the financial information in your devices could emerge as within the wrong hands.

Scrutinize and Report

  • Scrutinize every 1099, W-2 or other information filing you receive from third parties.  Don’t just file them away or hand them on your tax preparer. Don’t recognize the payer?  It may be a sign of fraud.  Here at Small Business Trends many years ago, we received a false 1099 -and narrowly avoided another fraud situation .  Fraud was dogging internet online affiliate marketing.  Fraudsters will arrange affiliate accounts (from offshore) under the name of legitimate websites within the U.S., and siphon off the income.  The company having the  affiliate program reports the income to the IRS under the victim-business’s name.
  • If you receive a tax form from anyone you don’t recognize, immediately write to the payer, via certified mail.  Tell the payer you suspect you were a victim of identity fraud and failed to receive the income attributed to you.  Ask them to analyze and proper their records.  Also, consider attaching an evidence for your tax return as to why you probably did not include the “income” in your return.
  • Call the IRS identity theft hotline at  800-908-4490, extension 245.  The IRS says this can take steps to “secure your tax account and match your SSN or ITIN.”  The IRS was piloting a program to compare taxpayers with their tax ID numbers, to forestall fraudulent returns from being filed.
  • Fill out the IRS Identity Theft Affidavit, Form 14039  (PDF).
  • Report it to the FTC’s identity fraud hotline: 877-438-4338
  • Report it to local police.
  • Report it to the three main credit reporting agencies:
    • Equifax – 800-525-6285
    • Experian – 888-397-3742
    • TransUnion – 800-680-7289
  • For what you are promoting, add to that list Dun and Bradstreet.  The iUpdate feature  allows you to update information regarding your online business credit.
  • Talk along with your attorney and/or tax preparer – before reporting to anyone.   They could advise you on what to do and the way to speak so you are perceived as blameless as possible (how we communicate in legal situations can avoid unnecessary grief later).

The IRS offers additional tips here .

Fraud Photo via Shutterstock

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