Identity Theft

No one likes paying taxes, but for many people, tax season is a good time of the year for their finances.  That’s because most people look forward to getting a refund on taxes paid during the year, and sometimes these refunds can be substantial.  These refunds are also vulnerable to identity theft.  Most people think of credit cards and other financial accounts when they think about identity theft.  But fraudulent tax returns are also a common identity theft scheme.

Unlike the typical target of IRS prosecution, those charged with tax fraud through identity theft have actually sought contact with the agency through the filing of fraudulent returns on behalf of another taxpayer with that taxpayer’s personal information such as their Social Security Number.  Using this information, fraudulent refunds can be collected on behalf of the taxpayer.  There are a variety of methods through which this information falls into the wrong hands.  The most commonly encountered method is phishing, which is the use of fake forms –usually online— to trick victims into providing personal information.  Sometimes tax preparers are targets of identity theft investigations.

So while other tax crimes involve the underpayment of taxes, this one actually involves stealing money from the United States Treasury through filing a fraudulent return in violation of 26 USC § 7207.  And those caught are rarely one time offenders.  In 2012, one man was prosecuted for submitting over six hundred false tax returns between 2009 and 2010.

The IRS takes these cases seriously, investigating thousands of suspicious and fraudulent returns every year and prosecuting hundreds of individuals.    Unfortunately, more than 400,000 fraudulent returns were filed in 2012 alone, dwarfing the IRS’s prosecution and investigation efforts.  The IRS is attempting to meet the challenge, training more employees and devoting thousands of employees to handling identity theft related issues.


Someone accused of identity theft can face serious penalties.  Each instance of tax fraud can be punishable by a year in prison and a $10,000 fine, more than most tax refunds.  And given that this crime is committed in high volumes, offenders are vulnerable to substantial penalties if consecutive time is imposed.  Identity theft may also be prosecuted under state laws prohibiting using another person’s personal information.

Identity theft is such a serious issue that it recently topped the IRS’s “Dirty Dozen” list of top tax fraud schemes of 2013.  This means you can expect even more resources devoted to investigating and prosecuting identity theft cases.  And given the severity, you can also expect the IRS to set out to make an example out of someone in the near future.  IRS and state authorities are also less likely to discriminate in who they prosecute when identity theft is uncovered.  Identity theft prosecutions typically involve large groups of people, sometimes with only tenuous connections to those most responsible.  But to state and federal authorities, even the smallest role player can be prosecuted for substantial crimes despite playing only a small part in the scheme.

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