When traveling cyberspace, it is impossible not to leave a trail of bread crumbs along the way, and if you are not careful you might just leave your PIN codes, Social Security number and passwords out there as well.
Identity thieves used to be content with getting their jollies off of ordering a couple of $500 pairs of shoes and a new TV and charging it to your credit card, or cleaning out your brokerage account, but it seems that got old and many have moved on to more sophisticated undertakings involving using Social Security numbers to commit tax fraud.
The IRS received nearly 450,000 complaints of tax identity theft last year, and it’s not slowing down. Tax ID theft can take several forms. One trick is the thief will file a tax return claiming they are owed a hefty refund, and the IRS will promptly send them a check and it will suddenly be deposited in an offshore account that cannot be traced. When the taxpayer files his taxes and claims a legitimate refund, the IRS either refuses to pay the refund, or if they do pay, then they can come back later and demand the overpayment made to the scammer back immediately, causing no end of stress for the legitimate taxpayer.
There have been cases I am told of paychecks being seized and accounts frozen over disputes like this and it can take years for the taxpayer to prove he is the victim.
Another form of tax ID theft is if someone who may not have a Social Security number (or doesn’t want to pay taxes) gives his employer a phony one that does belong to someone but claims a large number of exemptions so there is little if any withholding.
His employer then files the W-2 with the fake tax ID number on it and that income is credited to that Social Security number as taxable income. When the IRS finally gets around to reconciling what income was reported on the tax return versus what income was filed in the Social Security number, the legitimate taxpayer will get the bill for tax on income he did not ever receive. Even worse is initially the collection letters may go to the scammer’s PO box that is untraceable and the real taxpayer has no way of knowing he is under investigation until the IRS starts seizing assets. Again, proving you are a victim can be a harrowing process.
The worst part of this is that it can take years for the IRS to reconcile what is reported versus what is not, and that means the difference in tax owed could be tens of thousands of dollars, or more, and be doubled or tripled with penalties.
For years people have been told to check their credit reports to watch for signs of ID theft, but now it is becoming apparent that is not really enough. The IRS now recommends that taxpayers periodically submit a 4506-T form, requesting a transcript of their tax account activity. This will show, among other things, all taxable activity associated with a given Social Security number. It will detail income reported, taxes paid, returns filed and the like. If there is income reported or refunds paid that you don’t know anything about, then you need to take immediate action.
To complete this process, go to the irs.gov and find form 4506-T (not 4506 — there is a difference). You can complete the form and select the tax years you want to check out and be sure to check the box that says “account transcript.” This is important because if you check the box “return transcript,” then you will only get the information you probably already know about that you put on your return. The account transcript will be far more detailed and show if there are any unknown activities on your Social Security number. This process can take about two to six weeks.
Now, back to the point of my story, if you have been a victim of identity theft on your credit report, then your mortgage lender will pick it up when we run your credit. I’ve had to deliver the bad news to more than one loan applicant that their credit was trashed and watch the painful process they go through cleaning it up.
When we check that your tax returns you gave us match what was filed, we only check for that; we do not check your tax transcript which is where all of this would likely show up. But if a tax levy or lien suddenly show up during the application process, then it is up to the client to sort it out with the IRS, and legitimate or not, the loan approval process will be halted until the matter is resolved.
Chris Neuswanger is a loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His blog and a collection of his columns may be found at www.mtnmortgage guy.com.