By Walter Dubowec

There is a growing problem with identity thieves making false refund claims through the IRS using stolen identities, reports the Wall Street Journal. These criminals file phony tax returns with your name, Social Security number and other personal information to collect a refund.

Growing numbers of victims are complaining to the Internal Revenue Service and the Federal Trade Commission about this scam.

Identity theft has become one of the "most serious problems" facing taxpayers, said IRS National Taxpayer Advocate Nina Olson in a report to Congress early this year. Among the major problems that can arise are:

The problem is rapidly escalating, having more than doubled over the past few years. The Federal Trade Commission received almost 21,000 complaints on tax-related identity-theft issues in 2007, up from 15,000 in 2006 and 8,000 in 2003.

Ms. Olson believes those numbers "significantly understate" the size of the problem and the number of taxpayers hurt by it because, she says, the agency doesn't have a comprehensive method of tracking the various types of identity-theft cases.

Here are examples of tax identity fraud:

1. Multiple Tax Refunds: In one recent case in Pensacola, Fla., a former Girl Scout leader, was sentenced to 10 years in federal prison after pleading guilty to multiple counts of identity theft and filing "false and fictitious" claims for tax refunds. The woman created a bogus Girl Scout medical-release form to get sensitive information, including children's Social Security numbers. She then used the information to prepare and file electronic federal income-tax returns

The phony refunds were transferred into five different bank accounts she controlled. She "filed false claims totaling more than $187,000, from which she obtained more than $87,000" from the government "as a result of fraudulently using the identity of these children, including her own children.”

2. Refund Anticipation Loan Rejected: A Connecticut woman was recently notified by a New York bank that her application for a refund anticipation loan had been rejected.

"That blew my mind," she says -- because she hadn't applied for such a loan and hasn't yet even prepared her tax returns for 2007. She also recently received a letter from the New York state tax department questioning her 2007 return, which she hasn't yet filed.

"It's horrible," she says. She has no idea how her identity was stolen -- but adds that "I now shred everything that comes to my house with my name on it" before throwing anything away.


3. Thief Collects $4,005 Instant Loan from H&R Block: In another recent case, the victim was a 53-year-old Michigan woman named Marie Mendoza. Ms. Mendoza received a call from an H&R Block representative at a nearby office. The tax-preparation firm had prepared her returns for the past decade or so. She says the Block representative asked her to bring back some paperwork she accidentally had taken with her two days earlier when she was there to file her return for 2007.

"I said, 'What, are you kidding?' " Ms. Mendoza replied that she hadn't been to the Block office at all this year, hadn't filed her tax return for last year -- and isn't planning to use Block because she feels they charged too much last year.

Ms. Mendoza soon discovered that someone had filed a fraudulent return in her name. The thief had arranged to collect $4,005 through an instant loan and already has pocketed the money. "It was very upsetting," she says.

Ms. Mendoza says Block has said she will not be held responsible for the loan, but her problems are far from over. When she tried filing her tax return electronically, the IRS rejected it. That rejection was "very stressful," she says, because she needed that refund to pay her bills. Since then, she says, she has had to borrow money, mainly from friends. She recently filed her federal income-tax return on paper but doesn't know when she will get her refund.


4. Illegal Workers Use Stolen SSN's: To make matters worse, refund fraud isn't the only type of tax-related identity theft. In other cases, the thief uses a stolen Social Security number to get a job in the U.S.

In a typical case, that person's employer later files a Form W-2 reflecting the wages, and IRS data systems attribute those wages to the rightful owner of that Social Security number. Victims discover the problem after getting a startling notice from the IRS asking about unreported income.