By Walter Dubowec

With the federal tax filing deadline just around the corner, USA Today is reporting identity theft is a growing menace to honest taxpayers.

Identity theft experts also report that credit freezes and credit monitoring provide no protection against this type of identity theft. Tax fraud is a growing form of identity theft which begins with the misappropriation of one's Social Security number - a valuable piece of personal data that is not protected by either credit freezes or traditional credit monitoring.

Only an identity monitoring system offers any form of advance detection. Failing that, taxpayers are advised to acquire an identity recovery service to help break through the IRS bureaucracy as they attempt to reclaim their stolen identity.


               

Tax-related identity theft is a major problem

David Hodge of Mount Vernon, NY got a big surprise when he filed his federal tax returns. "I was stunned," says Hodge, when his accountant said the IRS had rejected his return because someone had already filed using his name and Social Security number.

Hodge contacted the IRS and he was told to produce copies of his Social Security card and birth certificate within 30 days, "or else I would probably have more problems with that number."

As tax deadline day approaches, Hodge's bad experience is becoming more common. Federal Trade Commission complaints involving tax returns linked to identity theft are up 158% since 2003. Similar complaints to the IRS Taxpayer Advocate jumped 644% in three years. Last year there were over 21,000 known cases, but experts believe the problem is much larger.

Nina Olson, head of the IRS Taxpayer Advocate office, reported to Congress that identity theft is now one of the top problems facing taxpayers. Olson believes the statistics only reflect a small part of the problem.

"If you want quantification, we don't know," Olson says. "The IRS has no idea how many cases of identity theft exist."

Senate Finance Committee Chairman Max Baucus, D-Mont., criticized the tax agency's efforts to combat the problem during a Thursday hearing. Saying, "Victims of identity theft deserve better," he directed the IRS to produce a comprehensive action plan within 90 days. IRS Commissioner Douglas Shulman, conceding the agency's response to the problem "is not where it needs to be."

"It's time to end the nightmare for honest American taxpayers who fall victim to identity theft," said Baucus.

That identity theft nightmare is spreading. This according to USA Today interviews with more than a dozen accountants and other tax experts across the country.


Many different schemes to which taxpayers fall victim

Often, identity thieves look to collect a fraudulent tax refund. They file with one stolen identity, claim multiple dependents and apply for the federal Earned Income Tax Credit. An identity thief can get a tax refund worth thousands of dollars this way.

Diana Aliffi, a Riverhead, N.Y., accountant, allegedly stole former clients' personal information in a scam that could have netted up to $19 million in tax refunds, according to an indictment recently unsealed.

"People create a phony business, phony children, phony working hours and other details to get a very nice refund," says Eduardo Leiseca, an enrolled agent in Miami who says a client who ran an import-export business fell victim to just such a scheme.

Stealing someone else’s identity can help thieves hide a criminal conviction, illegal-immigration status or other problem that could block them from getting a job. Their employers file W-2 wage-reporting forms with the IRS, which attributes the income to the true owner of the Social Security number. Victims don't discover the problem until the IRS contacts them with questions about under-reported income.

Eventually, the innocent victims are faced with weeks or months of battling the bureaucracy to verify their identity so as to avoid longer-term financial damage.

A New York State Police trooper whose identity was stolen last year waited from February until September to get his anticipated tax refund as the IRS sorted out the problem. "He was counting on that refund to pay his real estate tax bill. He didn't have the money to pay on time … and he had to pay penalties and interest, so of course it was a hardship," said his tax preparer.


ID theft victims forced to wait for refunds

A worker at the Hiram Walker distillery in Fort Smith, Ark. received an IRS letter questioning whether he had under-reported his income, says Charles Homolka in Muldrow, Okla., who prepared his tax return.

"Someone using his name and Social Security number worked at an aircraft factory in California. The IRS thought my client was hiding the income," Homolka says. "It made me laugh, because the commute would have been murder."

The distillery employee wasn’t laughing, because the problem took at least three months to resolve with the IRS.

Many cases take far longer. From 2002 through 2005, multiple identity thieves used the name and Social Security number of a Mexican-American factory worker to get jobs in Kansas, Texas and New Jersey, says Bob Smith, a tax preparation agent in Albert Lea, Minn. 

"One year, he supposedly had over $240,000 in income" from all the different jobs, Smith says. "He said, 'I'll pay the tax if I can have all that income.' "

Each time, the IRS held up the worker's tax refund while investigating whether he had under-reported his income, Smith says. Each time, it took about six months to prove his client hadn't worked elsewhere and to get the refund released, he says.

Many ID theft victims complain about IRS delays and bungling in resolving their claims. Olson acknowledged in her congressional report that while IRS response has improved, the agency "too often exacerbates the difficulties" faced by victims. She said the IRS:

•Used procedures that ignored common-sense evidence about the rightful owner of a disputed Social Security number.

•Gave alleged victims temporary identification numbers to file tax returns and then denied tax benefits because they did not use Social Security numbers to file.

•Provided inadequate authentication processes for the electronic filing system used by many taxpayers and tax preparers.

•Provided instructions that varied from office to office, leaving victims "bounced around from one place to another."


Tax fraud begins with the theft of a Social Security number - personal data not protected by either credit freezes or traditional credit monitoring.

American taxpayers need to be on the alert. The ID theft protection they thought they had, may not provide much protection at all.