Tax Filer Identity Theft Risks

During the tax season, consider the tax filer identity theft and related risks. File your taxes very carefully assessing the methods by which you plan to prepare and file your taxes. There are many ways we prepare and report our taxes these days, some of which may lead to tax filer identity theft.

Some of us prefer the do-it-yourself method. You could print the relevant federal tax forms from the IRS web site or get a copy from the post office (if they’re available) and manually complete and send the tax forms to the IRS or you could use a tax software. A tax software such as TurboTax is a tax calculator which determines refund or liability for the tax filer and helps automate the tax reporting process by asking you a few questions about your situation and then prepares your tax return as you complete the various sections that you selected as relevant to your situation for the tax year such as activities in stocks, property, business, etc. You can buy the tax software from major department stores during the tax season or you can download it from the internet and charge it to your credit card. Here’s the catch, even if you buy the software from the store, you will need internet access to update the software after you load it to your computer. In either case, you should check for periodic online updates, especially right before you file your tax information to the IRS to make sure all recent tax changes have been incorporated into your tax software.

A tax software is highly recommended compared to the manual process if you can afford it especially if you have a somewhat complicated tax situation but make sure that 1) you select a well known software from a stable company that has gone through many versions to fix all the bugs, 2) you never use a new software that just came out even if it’s free because most likely you will face many bugs, malfunctions or miscalculations, 3) you never use free tax servicing offers and software as you may compromise your personal information, and 4) you buy the software from a store, load it on your computer and then update it via the internet to avoid online payment processing, thus reducing the risk of tax filer identity theft, unless of course you trust the online source and understand your risks. If your tax situation is really complicated, then let a tax specialist prepare your taxes instead of doing it yourself.

Another method for preparing and reporting your taxes is online tax preparation which presents one of the greatest tax filer identity theft risks today. The major differences between preparing your taxes on an online website and on your computer (by purchasing the tax software as explained above) are that when you buy the software, you own the software and more importantly you store your tax data on your computer as you prepare your taxes up until you file your taxes with the IRS. In other words you have full and sole custody of your tax information during the entire tax preparation phase. However, when you prepare taxes on a website, your tax data is stored on the vendor’s computer server for the period in which you prepare your taxes and maybe even after you’re done with filing your taxes. Unless you know exactly where that tax computer server is located, and how secure it is, and how long the vendor is going to keep your data, you take a great deal of tax filer identity theft risks. Another tax filer identity theft risk is that since you have to use a username and pass code to access your tax data on the website, you risk the possibility of an intruder accessing your taxes information using your username and pass code obtained in one of many unauthorized ways.

The last but also a popular way to prepare taxes is to hire a Certified Public Accountant (CPA) or Certified Tax Preparer (CTP) to prepare your taxes, especially if you have a complicated tax situation. Although, a tax preparer does not need to be a licensed CPA or CTP, a licensed tax expert is highly recommended who has integrity and experience. Check his background and ask around for referrals. Make sure his license is active and there are no complaints or cases against him. Once you pick a licensed tax expert, sit down with him or her and make sure you clearly understand how the expert prepares, files and secures the tax returns. If you are not comfortable with the way your taxes are prepared and filed considering the risks we just discussed in this article, find another tax preparer. Ask yourself the following questions during your discussions with the tax preparer:

-How does the CPA prepare my taxes? Does he use a tax software or prepares online?
-How does he file to the IRS? Electronically or manually? How safe is the way he files?
-Does he share his office or computer with other practitioners or companies?
-Is the building or the office secure?
-Does he backup the data in case he loses them in a fire or theft?
-Where does he keep all the receipts and tax forms? Are they secure at all times?
-Is his license active?
-Are there complaints or lawsuits against him?
-How long has he been in business?
-Is tax preparation his specialty or something he does on the side?

In conclusion, and to reduce the risk of tax filer identity theft:

1) understand the tax filer identity theft and related risks we discussed here,

2) feel comfortable with the way your licensed tax preparer manages your tax returns throughout the tax return cycle phases; a) preparation, b) filing, and c) post-filing,

3) don’t be shy to ask your friends and the tax preparer questions,

4) observe his work environment and check his background - don’t just rely on his answers,

5) never prepare your taxes online unless and until you fully understand and feel your risks and concerns are properly controlled and addressed – don’t do business with any tax preparer who prepares tax returns on line unless you understand and assume the risks,

6) use secure means of reporting taxes whether filing electronically or manually. If you file manually, use a tracked shipping method to ensure your personal and tax data are not lost, thus preventing potential tax filer identity theft.

7) don't connect the computer where your tax information is stored to the internet; this can allow an intruder to steal your tax information including your personal information. Use the computer to access the internet after you move your tax information out of the computer by either printing the tax returns for your records, storing the tax data on a removable storage device that you keep secured, or placing the tax information on another computer.

Tax Resource Links:

Tax Help IRS Website  
Wikipedia Sales Tax By State

Learn about how to check the status of your tax refund to detect and resolve tax filer identity theft.