Taxpayers see red over identity theft

Tops IRS 'dirty dozen' list of tax schemes

Apr 7, 2013 @ 12:01 am

By Liz Skinner

tax, taxes, IRS, taxpayers, ID theft, identity theft
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Identity theft cases tend to peak during tax-filing season as thieves snatch taxpayers' IDs to file fraudulent returns and claim refunds, so now is a good time for financial advisers to talk to clients about steps they should be taking to avoid having their IDs filched.

The Internal Revenue Service placed identify theft at the top of its “dirty dozen” list of tax scams this year and has 3,000 people working on such cases.

“This tax season, the IRS has stepped up its efforts to protect taxpayers from a wide range of schemes, including moving aggressively to combat identity theft and refund fraud,” said acting IRS Commissioner Steven T. Miller.

Identity theft is “a growing problem in the tax area,” said Martin Davidoff, a certified public accountant with an eponymous firm.

Of about 130 clients, two each year typically suffer from identity fraud that gets discovered when they attempt to file their returns and discover that someone already has. The IRS doesn't make people liable for the frauds, but it is a rigorous process that delays their refunds.

Financial advisers are increasingly concerned about clients' becoming victims, and many recommend that they take proactive steps to avoid theft, including cutting up debit cards, buying credit protection from a service or even "freezing” their credit.

About 9 million Americans a year have their identity stolen, costing consumers about $5 billion, according to the Federal Trade Commission.

And fixing one's credit after such an event costs an average of $1,173 and takes about 175 hours. Credit issues can prevent someone from getting a home or auto loan, or even from being hired for a job.

"Protect your clients," Sam Richter, chief marketing officer of ActiFi Inc., told a group of advisers at a Financial Planning Association conference last month. “You have a responsibility to figure out how to help them get identity theft protection.”

One of the easiest moves that Mr. Richter advocates is eliminating the debit card.

“Cut up debit cards into little tiny pieces,” he said.

If the card is stolen, thieves can use it like other credit cards for purchases right out of the checking account. Also, thieves can “shoulder surf” at the grocery store checkout or videotape ATM transactions to capture the four-digit personal identification number, which is the only thing protecting the funds in that account if the card is stolen or lost.

Protecting credit

Adviser Lon Jefferies of Net Worth Advisory Group LLC said that he talks to all his clients about how to protect their credit.

He sees it as a way to add more value to his services.

“They've worked hard to establish credit, but now they need to protect it,” Mr. Jefferies said.

He recommends that clients try several free services that provide alerts when something suspicious lands on a credit report.

For instance, Credit Sesame tracks information on Experian credit reports, and Credit Karma monitors TransUnion reports.

Mr. Jefferies also recommends that clients order a free credit report each year from the three major credit agencies through AnnualCreditReport.com.

Adviser David Krietzberg of an eponymous firm said that he advises clients to take an even bolder step to protect their identity: freeze it.

Such a move involves clients' contacting the three major credit agencies and requesting that they lock up their credit, which means that the agencies can't release their credit report to others.

Then, each time they need to make a large purchase, get a car or other loan, they have to contact the services and ask for a “thaw” for a certain period of time, which costs $5, Mr. Krietzberg said.

“The way I look at it, Lifelock and companies like that are an alarm system to alert you when an intruder enters your credit home, but a credit freeze puts a deadbolt on the front door of your credit line,” he said.

The only drawback that Mr. Krietzberg has heard of is that it can be difficult for those who freeze their credit and lose the password or PIN to make changes because it can take months to prove who they are.

“But we're going to be seeing more and more identity theft, which is very expensive and it's absolutely horrible,” Mr. Krietzberg said.

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