How Identity Theft Can Disrupt Your Taxes

Tax-related identity theft and fraud can be a pain to deal with, and it's often difficult to detect until it's too late.

A fraudster might use your Social Security number (SSN) or individual tax identification number (ITIN) to file a fraudulent tax return and claim a refund. Even if you're not entitled to a refund, the fraudster could make up information to claim credits or deductions that increase the refund. They then have the refund sent to an account or address they control.

You might not realize you're a victim until you try to file your tax return and the IRS rejects it. Then you're stuck waiting months—or longer—for your refund. Fortunately, you can take steps to limit the chances of becoming a victim of tax identity fraud.

How Does Identity Theft Happen?

Identity theft can happen in various ways, including when:

• A data breach leaks your information.
• Someone steals your information from a physical document.
• Your computer is infected with malware that steals your information.
• Someone tricks you into sharing your personal information by text, by email or over the phone.

You could become a victim even if you're careful about sharing your personal information and keeping your devices safe. According to the nonprofit Identity Theft Resource Center (ITRC), there were over 1,500 data compromises and over one billion data breach victims in the first half of 2024 alone. At this point, it may be safest to assume that your personal information is compromised.

But the person or group that steals your identifying information won't necessarily use it once and move on. They might not even try to use it at all. Instead, some criminals focus on stealing and selling personal information to many people. The buyers use it to commit various types of fraud, including tax fraud.

Tax Identity Theft Can Lead to Major Delays

Victims of tax identity theft aren't responsible for fraudulent tax bills, but clearing up the situation can be a nuisance.

You'll want to report the fraud, mail your legitimate tax return with an extra identity theft-related form and then wait for the IRS to resolve your case.

The biggest issue is that you must wait for your refund while the IRS investigates your case, which could lead to other problems if you're counting on the refund to pay off debt or cover other expenses. You may also experience delays when you're applying for a loan or credit card because the IRS won't release your tax transcripts to other people or companies while your case is pending.

According to the Taxpayer Advocate Service—an independent part of the IRS that helps taxpayers—the IRS may take over a year and a half to process identity theft cases. The target timeline is four months or fewer, but that could still burden some taxpayers.

Warning Signs That Someone Used Your ID To File a Tax Return

The IRS shares several signs that someone used your information to file a fraudulent tax return:

• Trouble filing a return: You get an error message when you try to e-file your return, saying there was already a return filed with the same SSN or ITIN.
• The IRS asks you to verify your identity: The IRS proactively reviews returns for fraud, and it may send you a letter asking you to verify your identity.
• Unexpected mail from the IRS: The IRS might send you other letters or messages that could tip you off that something is amiss. These might include a copy of your tax transcript, a notification that an online account was created or changed, a notice that you unexpectedly owe taxes, notices related to income from somewhere you don't work or a letter with a new employer identification number (EIN). If you didn't do anything that would prompt these notifications, it might be a sign of tax identity fraud.
• Incorrect records: You can also check your online IRS account and look for incorrect information related to previous tax returns.

5 Steps To Take If You're a Victim of ID Theft Tax Fraud

Here are five steps you can take if the IRS suspects—or you know—that you're a victim of tax-related identity theft:

1. Respond to the IRS notice: The IRS may send you a letter asking you to verify your identity using an online tool, over the phone or by visiting a Taxpayer Assistance Center.
2. Fill out an Identity Theft Affidavit: Complete an Identity Theft Affidavit if an IRS notice asks you to or if your return was rejected. You can submit this form online, or print and attach it to your tax return.
3. File a paper tax return: You'll need to complete, print and mail your printed tax return. The IRS has different addresses depending on the form you're using and where you live.
4. Report the identity theft to the FTC and police: Use the Federal Trade Commission's (FTC) IdentityTheft.gov site to report the identity theft and fraud. The FTC can create a personalized recovery plan for you based on your circumstances. You can also report the fraud to your local police department.
5. Contact your state tax agency: You may also want to contact your state tax agency to find out how you can report the identity theft and if there's anything you can do to protect yourself at the state level.

If you need additional assistance, call the IRS Identity Protection Specialized Unit at 1-800-908-4490. The ITRC also offers free recovery assistance by chat, phone or text, although it's geared toward helping identity theft victims in general rather than tax identity fraud.

Preventive Measures To Safeguard Your Identity and Taxes

Although you can't necessarily prevent someone from stealing your personal information, there are ways to make it more difficult. You can also put safety measures in place to help stop someone from filing taxes or opening credit accounts in your name.

• Create an IRS Identity Protection PIN (IP PIN): An IP PIN is a six-digit code that you'll add to your tax return. The IRS will automatically reject e-filed tax returns that don't have the correct IP PIN, which can keep someone from filing a fraudulent return in your name. The IRS assigns these codes to known identity theft victims, but you can also apply for an IP PIN on your own. Your IP PIN will change every year, so be sure to check for your new one before filing.
• File your tax return early: Completing and filing your tax return as soon as possible can also decrease the chances that someone else files a return with your information.
• Freeze your credit: Freezing your credit limits access to your credit reports. It won't keep someone from filing a tax return in your name, but it could keep someone from opening a new credit card or loan in your name. You can freeze and unfreeze your credit reports at all three bureaus—Equifax, Experian and TransUnion—for free online, by phone or by mail.
• Beware of IRS impersonators: Fraudsters and scammers may claim to be IRS agents to trick you into sending them your personal information. But the IRS doesn't initiate contact with taxpayers by email, by text or via social media, and it won't ask you for your IP PIN. The IRS has more information about how to know if contact is really from the IRS and if someone who visits you in person is an IRS officer.
• Use strong and unique passwords: Create strong and unique passwords for your online accounts, especially financial, tax software, employment and other accounts that may have your SSN. A password manager could be a simple and effective way to do this without having to memorize or write down your passwords.
• Enable multifactor authentication (MFA): Many websites and apps support MFA, which requires you to use several forms of authentication to access your account. Your username and password are usually the first form. The second may be a code that the company sends to your phone or email, or that an authentication app generates. MFA can keep someone from accessing your account even if they have your username and password, so try to enable it whenever you can.

Stay Informed and Vigilant

Keeping up with the latest scams and security measures can be difficult, but it's important. Some measures could help prevent specific types of fraud, such as the tax IP PIN and credit freezes. Others offer more general protection. When combined, the layered defenses can make you a more difficult target.

Want to learn more? The Synchrony blog is filled with articles on protecting yourself from scammers and fraudsters and managing your money to achieve your financial goals.

READ MORE: How To Protect Yourself From AI Fraud and Scams in Banking