You’re more likely to be struck by lightning than audited by the IRS, but that doesn’t mean filing your taxes is worry-free. The rapid rise of tax identity theft has forced nearly a million victims to wait months—and spend hours on hold with the IRS—to get their refunds. Crooks using stolen Social Security numbers claimed $5.8 billion in fraudulent refunds in 2013, according to the most recent count, and the IRS says it blocked phony refunds worth another $24.2 billion.
The IRS, state tax authorities and tax-preparation companies are fighting back, and some of the changes will affect how you file your return this year. Tax-software users will be required to create a password with a minimum of eight characters, answer at least three security questions and verify their e-mail address with a personal identification number. Make sure you remember or make note of this information because after an unspecified number of unsuccessful log-in attempts, you’ll be locked out of your tax program. Behind the scenes, tax-software companies will help the IRS identify multiple returns filed from the same Internet address or device. Tax-preparation companies will also provide information about the amount of time taken to prepare returns, which will help flag fraudulent returns automatically generated by a computer program.
Beefier security measures will force residents in some states to wait longer for their state tax refunds. The delays will give officials more time to match information on tax returns to residents’ W-2 forms, one of the most effective ways to identify a fraudulent return. Although the law requires employers to give employees their W-2s by January 31, most state tax agencies (and the IRS) usually don’t get the information until April. Utah lawmakers enacted legislation directing the state tax department to wait until March 1 to deliver residents’ refunds unless employers have already filed W-2s with the state. The Illinois Department of Revenue announced in January that it doesn’t expect to send out refunds until March 1. Virginia and New York have also warned that some refunds may be delayed.
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The IRS still expects to deliver 90% of federal refunds within 21 days after returns are filed. That gives bandits plenty of time to file a fraudulent return before the IRS receives your W-2. Starting next year, the IRS should get W-2s at least a month earlier, thanks to legislation enacted in 2015.
In the meantime, your best defense is to file your tax return as soon as possible. That won’t stop crooks who have stolen your Social Security number from filing a fraudulent return, but they can’t hijack a refund you’ve already claimed. If you believe your Social Security number has been stolen, you can take an additional step to protect yourself, says Bill Kowalski, director for tax consultant Rehmann Corporate Investigative Services: Fill out an Identity Theft Affidavit (Form 14039), and check Box 2 (for potential victims). The document will alert the IRS that your return could be compromised. Depending on your circumstances, the IRS may assign you (or allow you to apply for) a six-digit Identity Protection PIN (IP-PIN) to use when you file your return. If someone tries to file a return using your name and SSN without the IP-PIN, it will be rejected. Bad guys hate when that happens.
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