The Tax Form That Could Save Your Refund

The Bible tells us, “It is better to give than to receive.” Most Americans don’t feel that way on April 15. But when the Lord (a.k.a., an IRS algorithm) shines his countenance upon us and a portion of what we paid is returned in the form of a tax refund, it seems only fair that we actually get to spend that money.

Unfortunately, this is not always how it works. In 2011, 1.5 million Americans never saw their refunds or were forced to wait 200 days or more. They were diverted to prepaid debit cards that landed in mailboxes rented by identity thieves. The take: a combined $5.2 billion from American taxpayers. The problem is only getting worse. According to the Federal Trade Commission, tax and wage-related fraud accounted for 15.6 percent of all identity theft complaints the agency received in 2010. That percentage jumped to over 24 percent in 2011, and jumped again to 43.4 percent by 2012.

Stealing a tax refund is one of the most direct ways for an identity thief to monetize the information they steal. And it’s way too easy. Why should a thief go through all the trouble of manufacturing fake credit cards or returning fraudulently purchased electronics to stores for cash when he or she can steal more money, with less risk of detection and arrest, by scribbling your name and Social Security number on a 1040EZ and dropping it in the mail or e-filing it?

Not the last you’ll hear of ID thieves

Don’t think the trouble will stop once an ID thief receives a tax refund in your name, either. The transfer of money from the IRS is the best possible confirmation that an identity thief has the correct information about you. Now you’re really in trouble. There is every incentive for the thief to keep going, opening new credit accounts, hijacking old ones, and making fraudulent purchases in your name.

So, tax identity theft may in fact be just the beginning, not the end, of a crime spree that could sink your credit score and your finances and make you wish that the thieves had taken your life, too — because that’s how bad it will suck being you.

And while I do believe there could be a solution, it’s not going to happen overnight. Meanwhile, while the IRS’s high-speed, highly-automated tax processing systems make this tax identity theft possible, the agency also affords regular taxpayers a layer of protection (though not a sure thing by any measure), and a possibility to detecting identity theft early in the game.

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Defensive filing

IRS Form 8821 operates in a way similar to a power of attorney, in which a taxpayer grants the government authority to send tax documents to a third party. The form is traditionally used during a tax audit or when a taxpayer’s health declines. If the IRS spots a problem on a tax return, Form 8821 instructs the agency to send notification to both the taxpayer and his or her designated third party.

The beauty of it is that as opposed to traditional forms of power of attorney, Form 8821 allows the taxpayer to decide how much information the IRS can share with a third party.

“The 8821 is the general tax information authorization,” says Richard S. Goldstein, associate chief counsel for the IRS. “It’s tailored by the taxpayer, who can use it for any disclosure or all matters relating to a particular year, however the taxpayer wants to frame the information they are disclosing.”

Here’s how it works: Name yourself as the third party. That way, if an identity thief files a tax return in your name, hoping to snag your refund before you get the chance to file, the IRS would send any notifications or issues regarding the return to you. It essentially acts like a fraud alert and could give you enough time to stop your refund from finding its way to the wrong person. You can also use Form 8821 for your children, or a deceased spouse or parent, naming yourself as the third party so that you’re notified if anyone tries to use their identity. (Again, provided there is a problem with the tax return filed by the thief.)

So, while this is by no means a sure thing, criminals do make mistakes and when they do in this particular crime, it will cost them and not you. Form 8821 can serve like an early warning system, a canary in the mineshaft of your identity.

A better way?

Obviously, the form is no silver bullet for tax identity theft. It doesn’t prevent identity thieves from stealing your identity and using it to file a false tax return. Nor can it guarantee that you’ll be notified that your identity has been used for tax fraud. It works only after the fact, and only in cases where the IRS initiates a second round of communication after the fraudulent tax return has already been mailed out.

The IRS has tried a few reactive measures, though there may be a better solution. They may want to take their lead from amusement parks, many of which are using biometrics — specifically fingerprint readers. The technology is now cheap enough for the federal government to require that all tax preparers have a biometric fingerprint reader device wherever they do business. If you were to prepare your own taxes and e-file, you would likely need a biometric device at home. (They can be had for around $100.) Take it a bit further, let the Congress give a $100 credit to home e-filers.

If this sounds too extreme, perhaps you will be more comfortable with another solution: transactional notification. Banks and credit card companies offer it already. In the simplest of terms, every time something happens with relation to your account, you receive an email or a text letting you know about it. With regard to tax fraud, identity thieves wouldn’t even try because you’d know about anything they did immediately. It would cost the IRS some money, but nowhere near the $5.2 billion (that we know about) we’re all losing through tax-related identity theft crimes.

It’s time we stop accepting tax-related identity theft as a fact of life, and start thinking of real solutions to end it. I welcome your reactions and suggestions in the comment section below.

[Note: Remember, we are all entitled to one free credit report — though not credit scores — each year from each of the three national credit reporting agencies at the AnnualCreditReport.com website. Second, Credit.com’s free Credit Report Card provides access to two of your credit scores, and, because credit reports can be difficult to understand, it breaks down the information in your credit report in an easy-to-understand way, using letter grades.]

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