One trick could catch tax identity thieves early
(MoneyWatch) Tax identity theft is on the rise and while there's not a lot the average taxpayer can do to prevent it, there is one trick to catch it early -- Form 8821.
People who perpetrate tax fraud are looking for one thing: Refunds. An identity thief steals personal information from a taxpayer and files a fraudulent return in his or her name with a different address. The refund from that return is then deposited to a debit card, which is untraceable. Any follow-up correspondence from the IRS is then forwarded to the address the thief provided.
Typically, the taxpayer catches this fraud when he or she attempts to file their real returns and the IRS flags the return, because one was already filed using that Social Security number. But for people who do not regularly file returns for any reason, identity tax theft is virtually impossible to detect for the victim.
Form 8821 can solve that problem as well as potentially act as an early warning system for people who regularly file their tax returns. This simple tax form was not initially created to fight tax fraud. It's actually a tax information authorization form, that allows the government to send copies of all communication between a taxpayer and the IRS to an appointed party.
But the taxpayer could become the appointee for his or her children, elderly parents or submit a form for him or herself. That way, if the IRS has any correspondence with this thief, a copy of their correspondence is sent to the taxpayer. As soon as the taxpayer reads the letter, they know their identity has been compromised.
Bill Nemeth, an enrolled agent with Tax Audit Guardians in Atlanta has seen this happen numerous times.
"I'm seeing it often enough that I'm not comfortable," he said. "I'm seeing it in about 10 percent of my clients."
Data from the IRS supports what he's seeing. The agency stopped $20 billion in fraudulent refunds from being issued last year, up from $14 billion in 2011.
Nemeth receives copies of his clients' correspondences with the IRS just like someone who files a Form 8821 would. Recently, one of his clients received a notice about her recent tax returns -- only she hasn't filed one in years. The letter was sent to her at an address in Wyoming, a place the client has never lived.
The form is valid for three years, so after that time period it needs to be renewed. While it's not a perfect system, it is effective, Nemeth said.
"Best of all, it is free," he said.
