Both the IRS and National Taxpayer Advocate Nina Olson, who is charged by Congress with protecting taxpayers' interests, agree that tax ID theft is one of the most serious problems facing the agency.
According to the Treasury Inspector General for Tax Administration, a government watchdog, the IRS identified more than 1.8 million tax-related ID thefts during 2012, more than four times as many as in 2010.
In response, the IRS says it has expanded criminal enforcement efforts, is collaborating with 130 financial institutions to prevent ID theft and has greatly strengthened its screening filters.
Still, if you are a tax ID-theft victim—or someone whose return has been frozen because of attempted theft—getting a case resolved is often a long slog, according to Ms. Olson and tax preparers who are helping clients deal with it.
If you are a victim, you should immediately contact the IRS's Identity Protection Specialized Unit at 800-908-4490 and fill out a Form 14039 affidavit, according to an agency spokeswoman.
The IRS says typical cases are resolved in six months, but many take longer. George Williams, a CPA at Ross, Rosenthal & Co. in Morristown, N.J., has three clients with unresolved ID theft cases involving 2011 returns.
Mr. Williams says that since discovering the thefts, he has spent from six to 10 hours on each case—although he doesn't charge longtime clients his fee of $300-plus an hour. Although he uses a dedicated line for tax preparers, Mr. Williams says he has spent lots of time on hold or being transferred from office to office.
Ms. Olson has reported that the IRS has 21 separate units handling aspects of ID theft.
While Mr. Williams handles the IRS, his affected clients have other tasks. Each is checking his credit report every four months with one of the big three credit agencies: TransUnion, Experian or Equifax. Consumers are allowed one free report a year from each. Fortunately for these clients, there is no evidence of other problems.
Victims should beware of other ripple effects. ID theft can impede applications for mortgages or refinancings, says Pete Mills, an official at the Mortgage Bankers Association, because the IRS can't release tax information to lenders in cases of ID theft. Sometimes W-2 information can substitute, he says, but "the most problematic cases are with self-employed people."
ID theft also poses problems for student financial-aid applications, which also rely on tax information. Under an agreement between the U.S. Department of Education and the IRS, victims can submit a signed copy of their paper return accompanied by a copy of their IRS affidavit, a police report or other statement.
Some Medicare Part B and D recipients also run into snafus. Premiums are tied to income based on information from prior years' tax returns and then deducted from Social Security payments.
Peter Weitsen, a CPA at WithumSmith+Brown in New Brunswick, N.J., says one of his clients is getting higher payments than he should because an ID thief claimed a low income. "He's receiving money he isn't entitled to, but we can't find a way to fix" the problem, Mr. Weitsen says.
Victims due a refund will have to wait longer than normal. Mr. Williams says one of his affected clients has been owed $35,000 by the IRS for almost a year.
The IRS spokeswoman warns that all tax payments are due by April 15, even for people who find out they are theft victims after that date. (Often it can take 48 hours to get an e-filing receipt.) IRS computers won't accept electronic payments from e-filers whose returns are rejected because of theft, so last-minute e-filers who owe tax should consider printing a voucher and mailing it with a check.
Taxpayers whose electronic filings and payments are rejected should immediately file on paper, says the spokeswoman—and save a copy of the rejection notice to help ward off late-filing penalties.
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