This IRS Problem Has Grown So Large, You'd Be Foolish to Ignore It

In my youth I was pretty forgetful, and I considered myself downright fearless and brazen when it came to the possibility that my possessions might be stolen right out from under me. I frequently forgot to lock the front door to my house and often left my car unlocked, too. Luckily, I was never the victim of a theft, although that would have made getting rid of my first car a lot easier, come to think of it.

Unfortunately, for many others, theft is becoming all too common. But theft, as we know, has evolved with the dawn of the Internet from simply stealing your possessions to stealing your identity, which has proved to be a much more lucrative venture for would-be thieves. By stealing your name, address, Social Security number, and other vital information identity thieves are simply playing the numbers game come tax time. Even if 90% of their efforts are stopped by the IRS, the remaining 10% piece of the pie is more than enough to make it lucrative for thieves to continue with their scheme.

If you don't think this is a serious problem, then have a gander at these statistics compiled by the Boston Globe after combing through data from the Treasury Inspector General for Tax Administration.



Source: Treasury Inspector General for Tax Administration.
*2013 figures are through June 29, 2013. 

The IRS has a very big problem on its hands
In 2010 there were some 270,518 taxpayers affected by identity theft. In 2011, this figure more than doubled to 641,052. In 2012, it basically doubled again to 1.2 million. And through just the first half of 2013 there were 1.63 million taxpayers affected by identity theft, lending credence to the possibility that these figures could double for a third straight year.

The really concerning aspect about identity theft is that literally no one is safe. As the Boston Globe's report notes, in 2011 potentially fraudulent returns were filed "using Social Security numbers of 1,451 children under 14 years, 19,102 dead people, 37,249 prisoners, and 753,000 people whose income level did not require a tax return."

With so few checks and balances in place, and just 3,000 IRS agents exclusively pledged to preventing identity theft (although more than 35,000 employees have been trained to identify identity theft, per the IRS), the average identity theft case takes a whopping 312 days to sort out. For you math-o-phobes, that's a tad over 10 months!

Source: Adam Thomas, Flickr.

Part of the problem is that we make it very tempting for would-be identity thieves to file fraudulent returns under other people's identity. Citizens whose income is too low to need to file a tax return rarely keep up on their account or credit history, allowing identity thieves to continue filing false tax returns in the hope of garnering Earned Income Tax Credit payments. According to ABC News earlier this month via the IRS' Inspector General, somewhere between $13.3 billion and $15.6 billion -- or a quarter of all EITC payments made in 2013 -- were fraudulent. This doesn't mean it was all identity theft per se, but I'd suspect a good chunk likely were. 

Source: Don Hankins, Flickr.

Access to files of recently deceased individuals is another way that identity thieves are able to try to pull one over on the IRS. With Social Security numbers on file, it's a practical invitation for thieves to try their luck.

Added together, these figures are what prompted Danny Werfel, principal deputy commissioner of the IRS, to proclaim that "refund fraud caused by identity theft is one of the biggest challenges facing the IRS today." 

What you can do to stop identity theft
If there is a ray of hope here, it's that you, the taxpayer, can take steps now to reduce your chances of becoming an identity theft victim. While there's no bulletproof way to secure yourself, here are some suggestions straight from the IRS that may help improve your chances of keeping your identity safe:

  • Don't carry your Social Security card with you. One of the easiest ways for criminals to get their hands on vital information is if you leave it within arm's reach in your wallet or purse. Keep sensitive documents containing your Social Security card or individual taxpayer identification number locked up safely at home.
  • Check your credit report regularly. According to the IRS, you should check your credit report at least once a year. The good news here is that you can actually get a free report from each of the three major credit bureaus once a year, so use it!
  • Protect your online information. Although you should be doing this already, the IRS strongly suggests setting up firewalls to protect your network, using antivirus software to protect your computers, and frequently changing the password of important accounts to make it more difficult for Internet-based hackers to access your information.
  • Avoid giving out personal information over the phone. Sometimes the oldest trick in the book is to pretend to be a government agent and to scam unsuspected taxpayers into giving out their personal info over the phone. The general rule here is that unless you initiated the call, it's probably best not to transmit that data over the phone.


Source: Joi Ito, Flickr.

Of course, there are a number of other things you can consider as well. Credit bureau TransUnion suggests being especially careful with your trash. Your trash is a thief's treasure, and intact banking statements and other bills could serve as the perfect fodder to allow them to take your identity.

Another option is to beef up your external security by potentially turning to a company such as LifeLock , which specializes in protecting an individuals' identity against a number of frauds, including tax fraud. Now to be clear, you can take a lot of steps that LifeLock will take to protect your identity for free; however, the ease of the service and putting it in someone's hands clearly speaks to the desire for convenience.

Whatever you do, do something
The ultimate point here is that identity theft is no longer something that affects "the other person." With 1.63 million taxpayers coping with identity theft through just the first six months of 2013, we're looking at a scenario where more than one in 100 filers could be a victim. You need to be proactive about protecting your personal and financial information, because the damaging aftermath of straightening everything out makes even the simplest things, such as applying for a loan to buy a house or refinancing, practically impossible.

Let these figures serve as your wake-up call if you are now like I was nearly 20 years ago.

Another way you can be proactive about your retirement is by taking advantage of this little-known tax "loophole"
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new free special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

The article This IRS Problem Has Grown So Large, You'd Be Foolish to Ignore It originally appeared on Fool.com.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool recommends LifeLock. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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