Identity theft is a growing problem throughout the country, and it is affecting the filing of tax returns in a major way. The Federal Trade Commission reports that it continues to be the number one consumer complaint reported to the agency year after year.

Identity theft can be a risk every time you swipe your credit card at a store or provide your Social Security number online. On the tax front, clever con artists masquerading as IRS representatives or agents may try to steal your vital information and use it for illegal means. Or an identity thief could file a fake tax return for you in order to obtain a refund.

Incidences of tax identity theft have increased significantly in the past couple years. The IRS’s Incident Tracking Statistics Report shows that 641,052 taxpayers were affected by identity theft in 2011 compared with 270,518 in 2010.

Here are some typical tax identity theft scams:

  • You receive an IRS notice or letter stating that more than one tax return for you was filed. A criminal may have used your identity to fraudulently file a tax return and claim a refund. Generally, identity thieves use a stolen Social Security number and try to file early in the tax season to collect a refund before the legitimate taxpayers file.
  • You are informed by the IRS that you have a balance due, a refund offset, or a collection action was taken against you for a year in which you did not file a tax return.
  • IRS records indicate you received wages from an employer unknown to you.

To make matters worse, when two tax returns are filed with the same name and Social Security number, the real taxpayer’s refund can be delayed for months while the IRS determines who is legitimate.

“The growth in these cases has overwhelmed IRS resources and burdened taxpayers,” according to a recent report by the Treasury Inspector General for Tax Administration (TIGTA).

Some problems TIGTA found include:

  • The IRS does not work to resolve identity theft cases quickly. It can take more than a year to resolve them.
  • Communications between the IRS and identity theft victims are limited and confusing. Victims are asked multiple times to substantiate their identity.
  • When a taxpayer calls the IRS to report that his or her electronic tax return was rejected because it appears another individual already filed a tax return using the same identity, the IRS instructs the individual to mail in a paper tax return with the Form 14039, Identity Theft Affidavit, and attach supporting identity documents. However, the IRS has been processing these mailed-in tax returns using standard processing procedures and does not prioritize them.
  • Identity theft guidelines and procedures are dispersed among 38 different Internal Revenue Manual sections. The guidelines are inconsistent and conflicting.
  • The IRS makes little use of the data from the identity theft cases to identify any trends that could be used to detect or prevent future refund fraud.

The IRS is aware of the tax identity theft trend and in the latest version of its “Dirty Dozen Tax Scams” for citizens to watch out for, a list that the IRS has been producing for years, identity theft is the number one item for 2012.

In response to growing identity theft concerns, the IRS recently embarked on a comprehensive strategy for preventing, detecting, and resolving identity theft cases as soon as possible. The tax agency has also stepped up its internal reviews to spot false tax returns before tax refunds are issued and vowed to continue to help victims of identity theft refund schemes.

Anyone who believes that his or her personal tax information has been stolen and is being used for illegal purposes should immediately contact the IRS Identity Protection Specialized Unit.

If you want to read more about IRS activities on this issue, consult the Taxpayer Guide to Identity Theft or the IRS Identity Theft Protection page on its website. If you have concerns about your situation, contact your tax adviser.