Monday, February 18, 2008

Identity Theft And Your Taxes

We blogged earlier about the seven most common tax fears that prevent people from filing. One was a fear of having your personal info stolen. While, being someone who knows the tax system, this seems silly, it is a real concern in today's world. I know I've had personal experience with identity theft and it's no fun. I shredded everything with my name on it for months... and I still do to a degree today.

But we talk about taxes here at Tax Facts. So, how does Identity Theft relate to taxes? Jim over at IRSMind is currently doing a 4 part series on Identity Theft and taxes. I'd like to apply the "Tax Facts" mantra and put what he wrote into explicitly clear English to understand I.D. theft's tax ramifications.

Identity theft is the number one fraud concern in the United States today and causes a myriad of immediate problems such as emptied bank accounts, bounced checks, illegitimate credit card charges, credit report problems, and more. However, one item that may not show up for years, but will last for years, is the effect I.D. theft has on your taxes.

How the Problem Begins

Each year your employer(s) and financial institutions send all of your W-2 and 1099 forms, along with other tax documents, to both you and the IRS. The IRS matches all these forms to you by your social security number. Social security numbers are key, for they allow the matching of forms to people. Herein lies the problem. If someone is working under your social security number, their tax documents will be matched to you, along with your legitimate tax documents. Therefore, not only will your actual income will be reported as yours, but the identity thief’s will too.

When you file your return at the end of the year, the IRS processes it. They will run it through their system to make sure that you reported all the W-2 and 1099 income they have on file. If you’re a victim of identity theft, you’ll have tax documents that are left off your return (the I.D. thief’s forms) and red flags will be waved. The IRS usually takes about 12-18 months to notice the omission, but when they do you’ll receive a CP 2000 letter as notification of the discrepancy.

What This Means to You

Money and time. Essentially it becomes your word against the IRS’ and you start playing private detective to clear up the mess. While you are cleaning up the mess, the IRS will most likely asses you, which is assigning taxes, interest, and fees owed on the underreported income, and then start the collection process. At this point you are faced with an uphill battle of removing the assessment while the IRS has the right to forcefully take your money by filing tax liens and levying your wages and bank accounts.

How You Can Fix It

In short, fixing identify theft requires a proactive approach and proof by documentation. When you are a victim of identity theft, filing a police report is a necessity. Most people do not file a police report because they focus on the immediate problems—clearing up their bank account or credit card issues. However, documenting the incident and retaining these documents is also a must incase of future problems. But what do you do once you are assessed erroneous taxes?

  • Contact the IRS immediately- the contact information on your audit letter or CP 2000 will tell you who to contact
  • Get a copy of what has been reported to the IRS under your social security number (i.e. your “IRP document”)
  • Review the document for discrepancies and contact the employers/contractors/payers for a correction to their Forms- make sure they notify the IRS
  • If you cannot get the payer to correct the form, show proof that this income could not be yours: bank statements, police report, proof of identity theft in other areas (credit cards, etc.), and affidavits from your employer stating where you worked- and the timesheets
  • Consider changing your social security number if the SSA permits
  • Contact the Federal Trade Commission and file a complaint, use this as evidence for your tax problem
  • Report the tax fraud to the IRS immediately after you have discovered it

Ultimately, you may want to contact a tax professional that knows how to work within the IRS system to resolve your problem. Resolving tax disputes is a time-consuming process that can cause a lot of pain and suffering- especially if you do not anticipate what could happen to you.

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