Tuesday, December 1, 2015
To Beat Crooks to Your Tax Refund, Start Taxes Now
The waning weeks of the year present opportunities to take actions that might help save money on your 2015 tax bill, such as making deductible contributions to charity or harvesting money-losing stocks. Now also might be a good time to start preparing your income-tax return.
You read that right — it's not too early to start certain preparations for tax returns that won't be due until April.
On the surface, that seems like a crazy notion when we haven't even made it through the holiday season. You can't actually file a return this early — the Internal Revenue Service won't begin accepting returns until sometime in January. Nor do you possess the W-2s, 1099s and other supporting tax documents you'll need. Those won't be mailed out until early next year.
But depending on how complex your situation is, you might be able to get some of the supporting paperwork and calculations done early — compiling year-to-date charitable contributions, adding up medical expenses, crunching numbers on rental properties or freelance businesses or sorting through other transactions to see which ones might have a taxable impact. If you rely on a professional tax-return preparer, you might be able to schedule the first available appointments for next year.
But why bother with April still months away? To thwart potential tax-refund thieves, of course.
One takeaway from an identity-theft conference held recently in Phoenix is that speed matters. Much grief can be avoided if you can file and collect your tax refund before the bad guys do.
Melissa Richardson, an insurance agent in Michigan, recounted the effort and stress she faced after her income-tax refund was snatched by criminals. When she filed online in mid-March 2014, she was expecting a refund of about $1,100. But then she got the notification that a return already had been filed under her Social Security number and the refund taken, by someone in the Miami area. "The quick refund I was expecting was anything but," she said.
She estimates she spent 15 to 20 hours on the phone with the IRS, including waits of up to two hours at a time. She had to fill out forms establishing her identity and needed to file new tax returns — on paper.
This type of white-collar fraud has grown at a brisk rate, with more sophisticated criminals now getting involved. "For organized criminals, this is the crime of choice," said Adam Levin, chairman and founder of IDT911, which organized the conference.
Aside from safeguarding personal information and making sure you're dealing with a reputable return preparer, one of the few remaining advantages that taxpayers have is speed.
Crooks seeking to steal refunds do so by filing fake returns in the names of other people, while requesting that the payments be diverted to their own accounts. They succeed when they can get all this done before the real taxpayer files a return. So if you can beat the crooks to the punch and file as early as possible, you improve your chances of deflecting this danger. If you have all your supporting tax paperwork ready by January, rather than March, April or later, you'll be ready to go when W-2s and other tax documents arrive.
The roughly 30% of individuals who don't expect a refund typically prefer to wait to file so they don't have to make tax payments sooner than required. That's a legitimate reason to delay, but it needs to be weighed against the rising odds of becoming a tax-fraud victim.
The IRS has devoted more manpower and effort to thwarting tax-fraud risk, and much of it has been successful. According to a study by the Government Accountability Office, the IRS stopped $24.2 billion of fraud in 2013 but failed to prevent another $5.8 billion that went to criminals, with some uncertainty over how much more went undetected. The IRS is devoting more manpower to fighting ID theft, diverting resources from other areas.
Yet the tide hasn't yet turned.
"It has become a very international scheme," said Shawn Tiller, executive director of refund crime for the IRS' criminal investigations unit, speaking at the Phoenix conference hosted by IDT911. Tax-refund crooks generally have become more sophisticated and, because many are based outside the U.S., they're not easy to extradite, he said.
Richardson, the tax-fraud victim, says one lesson she learned is that preparation and speed are important. "It took over a year and a half to clear my name with the IRS," Richardson said. "I filed my taxes as early as I could this year, to beat anyone else to it."
Levin at IDT911 said taxpayers can improve their odds by safeguarding Social Security numbers and other personal information as much as possible. But given the high number of data breaches over the years, a lot of that information already is in the hands of criminals, he noted.
"All (crooks) need is a date of birth, a Social Security number and a name," Levin said. "Then they doctor up a W-2, and they're off to the races."
Levin, author of Swiped, a book on identity theft, also said it's important for consumers to monitor incoming tax-related mail in January, making sure mailboxes are secure and inquiring about W-2s and other documents that are slow to arrive. Then taxpayers should get moving.
"Consumers need to get their information as quickly as possible and file as quickly as possible," he said.
That might require a little added effort in the weeks before tax season actually gets going.