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IRS to identity-theft victims: Keep waiting

John Milenius filed his tax return in February, expecting a $5,059 refund. Instead he got a letter.

Someone had already filed a return using his Social Security number, according to the Internal Revenue Service (IRS). Milenius needed to prove his identity by going online and filling out a questionnaire. He did and, as instructed, waited to hear back.

Initially, the IRS representative said he should expect a resolution within 120 days. Four months later, with no sign of his refund, he called again. This agent suggested he check back in two more months.

"My sense is that the return is sitting in cyberspace being electronically ignored until somebody gets time to take the case up," Milenius said. "I feel like I'm caught in an endless bureaucratic loop."

Milenius is not alone. Roughly 1.4 million individuals -- about 1 percent of all U.S. taxpayers -- got similar letters this year, according to the IRS. However, the IRS will not say what percentage of those cases have been resolved.

In fact, the government is dealing with a fast-growing epidemic of tax identity theft, Eva Casey Velasquez, president and chief executive of the Identity Theft Resource Center, said. Identity theft is not only the top financial crime reported to the Federal Trade Commission, the subcategory of "government documents and benefits fraud" now accounts for nearly four in 10 identity-theft complaints. Tax return fraud makes up about 85 percent of that total, Velasquez says.

"This is a tremendously big and growing problem," she said. "And it's not just federal tax returns. It happens with state returns and with state boards of equalization as well."

Part of the problem is the electronic filing process is a fertile playground for fraud, Gary Iskowitz, managing director of his eponymous Los Angeles accounting firm, said. That's because electronically filed returns don't have to be signed, nor do they have to be turned in with copies of the taxpayer's W-2 forms. Instead, taxpayers essentially check a box to "sign" and fill in the information on their W-2's - or, if they're crooks, fabricate it - without providing any proof that the company or income listed on the W-2 actually exists. All they need is a real Social Security number to potentially rip off the government, often to the tune of thousands of dollars at a time. "It's a very lucrative fraud," Velasquez said.

Indeed, the IRS is so pressed to deliver refunds in a timely fashion that the checks are often processed before the agency can verify the data, Iskowitz said. That further helps crooks, who can have their refunds electronically deposited into bank accounts that can be drained before authorities discover they've been had.

Iskowitz thinks the IRS should issue every taxpayer a unique personal identification number, which would have to be submitted with returns to stop tax ID theft in its tracks. However, at present, the agency only issues PINs to those who have already become victims.

Meanwhile, new victims like Milenius are left to anxiously check the mail hoping the IRS will resolve their cases and return their money. They're given precious little guidance on how long that might take. Both Velasquez and Iskowitz said the time frame is so variable they can't even guess at a standard. Some identity-theft victims wait only a few months; others can cool their heels for the better part of a year.

Milenius said he realized too late that there was just one thing he could have done to protect himself -- adjust his withholding so he wouldn't have overpaid his taxes. After all, it's a lot easier to be patient when you are not waiting for a refund.

Iskowitz suggests any taxpayer who regularly gets a refund should go into their employee benefits department to reduce the amount that's taken out of their paychecks each month. Those who consider these over payments a sort of "forced savings" can set up automatic savings plans for the amount that's not withheld. That will give you the same economic benefit at the end of the year, without the necessity of waiting on the IRS.

As Milenius put it: "Moral to the story is never let anybody owe you money, not even your Uncle Sam."