Online Tax Filing a Hit With Taxpayers – and Thieves

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The vast majority of Americans filed their tax returns electronically last year, taking advantage of e-filing systems that offer convenience for taxpayers but also have opened up a major new avenue for tax fraud.

About 81 percent of taxpayers filed their returns electronically in 2012, the independent IRS Oversight Board said in a report released Friday. That represents about 119 million taxpayers and is an increase of four percentage points from 2011.

The steady increase in the number of people filing electronically makes sense: For most people it's easier and more convenient than filling out all those forms the old-fashioned way, with paper and pen.

Electronic filing of tax returns also has gained popularity in recent years with thieves, who use stolen Social Security numbers and other information to file fake tax returns using popular tax preparation software, and then collect hefty refunds.

The IRS has identified about 460,000 people who have been victimized by identity theft tax fraud since 2008, according to the IRS Oversight Board report.

The IRS has said that it is taking aggressive steps to stop such thieves from fraudulently filing electronic tax returns on other people's behalf. Those steps include adding more fraud screens and increasing the resources devoted to helping identify theft victims.

About 3,000 IRS employees are now working on identity theft issues, Beth Tucker, the IRS's deputy commissioner for operations support said in Congressional testimony late last year.

Still, security experts expect such fraud will continue to be a challenge this year.

"The thieves aren't stopping," said Linda Foley, co-founder of ID Theft Info Source and an expert on identity theft.

The IRS Oversight Board also said preventing identity theft tax fraud – and helping victims of the crime – should continue to be a big priority for the IRS.

"(T)he IRS faces a major challenge in preventing thieves from using the e-file system to commit refund fraud on a large scale, including schemes based on ID theft. The IRS also faces the challenge of providing responsive assistance to taxpayers who have been victims of tax-related ID theft," the report said.

Many taxpayers don't realize they are a victim of identity theft tax fraud until they try to file their own taxes and find out someone else has done so before them. In the past, people who were victims of such fraud have described a frustrating, often monthslong process of trying to resolve the fraud problems and get their real returns filed.

Foley cautioned that fears about identity theft tax fraud definitely shouldn't stop people from filing electronically. Online filing is still safer than filing by mail, she said, especially if you store the information you file electronically in a safe way.

"People should file electronically and then take steps to make sure that the electronic footprint that they made is safeguarded," said Jay Foley, who runs ID Theft Info Source with his wife, Linda.

Here are some other steps you can take to reduce your chances of being a victim of such fraud.

Use a trustworthy tax accountant: One of the easiest ways for thieves to get access to your personal information is if you give it to them. The Foleys cautioned that you should check carefully who is filing your return on your behalf, because that person could be tempted to sell your information or use it themselves.

File early: One key way to prevent fraud is to get your return filed before a thief has the chance to. Jay Foley said one common tactic is to take information that was stolen last year and use it to file a fake return as soon as possible, likely in early February.

Protect your data: If you file your return electronically, make sure that the computer you used is secure. Linda Foley recommends saving the data on a thumb drive that you remove from the computer once you are done filing and store in a secure space.

The IRS also recommends that people not carry their Social Security card with them or share their Social Security number unless absolutely necessary. They also recommend installing security software on your computer and running regular credit checks.

Jay Foley also said you can protect your data more easily by filing your taxes yourself, rather than sharing it with a tax preparation service.

"Unless you have a very serious reason for going out and hiring somebody to do your taxes, do them yourself," Jay Foley said.