Tax identity theft: What it is and preventive measures

What is tax identity theft? 

Tax identity theft is the use of someone else's Social Security number (SSN) or, less commonly, taxpayer identification number (TIN), to file a tax return or claim a tax refund or benefit before the legitimate taxpayer files. It's a form of fraud that not only steals money but also disrupts the victim's tax records and triggers a long and often frustrating process to clear the taxpayer’s name.

This type of identity theft takes advantage of a simple rule: the IRS typically processes the first return it receives under a given SSN. If that first return is fraudulent, any legitimate return filed afterward gets flagged as suspicious and delayed — sometimes for months or longer.

Put simply, the tax identity theft definition boils down to "refund or credit theft by impersonating someone on a tax form."

What are the motives for tax-related identity theft?

Tax-related identity theft happens for one of two main reasons with different consequences.

To steal your tax refund

One of the most common reasons for tax identity theft is to fraudulently claim a refund. A fraudster files a tax return using your name and Social Security number (or other taxpayer identification number) before you have a chance to. The goal is to collect your refund and vanish before the IRS notices anything suspicious.

You usually find out when your own return gets rejected with a notice saying a return has already been filed under your SSN. That's the first clear sign that someone else has filed in your name.

To use your identity for employment

One motive is employment identity theft. In this case, someone uses your SSN to get a job. Their wages are reported to the IRS as if you earned them. Months later, you may receive a notice from the IRS about unreported income, which you never actually earned. Now, the IRS thinks you owe additional taxes, and you may face an audit or collection actions. These cases often take a year or more to resolve, and while you work through it, your legitimate tax refunds may be delayed or frozen.

What happens if you're a victim of tax identity theft? 

Most people don't discover the fraud until it collides with their own return: the IRS rejects an e-file as a "duplicate" or mails a notice about a suspicious filing under their Social Security number. Victims of tax-related identity fraud often face:

• Refund on hold. The IRS parks the money until you prove who you are, a process that can span more than one tax year.
• Credit-file turmoil. Thieves often open credit cards or payday loans while your data is fresh, leaving unfamiliar accounts for you to dispute.
• State-level dominoes. Many states rely on federal data; a bogus federal return can trigger wrong state refunds or denial of benefits such as unemployment insurance.
• Audit letters. If the imposter's figures don't add up, the IRS treats you as responsible until the situation is resolved.
• Collateral identity crime. The same SSN can be recycled for medical identity theft or criminal identity theft, creating fresh headaches long after the tax case is closed.

How does tax identity theft occur?

Tax identity theft occurs when someone uses your stolen personal information — typically your name, Social Security number (SSN), and other details — to file a fraudulent tax return and claim a refund in your name. Here's how it usually happens:

1. Information theft: Criminals gain access to your personal information through data breaches, phishing emails, phone scams, or by stealing physical documents like tax forms or mail.
2. Fake tax return filing: Using this stolen information, they file a false tax return — often early in the season — and manipulate the numbers to maximize the refund amount.
3. Refund collection: The IRS, unaware of the fraud, processes the fake return and issues a refund, often through direct deposit, prepaid debit cards
4. You discover the fraud: When you later try to file your legitimate return, it's rejected because the IRS shows a return has already been filed under your SSN.

Some fraudsters also use children's identities to falsely claim dependents and inflate refunds, further complicating the issue.

Legal consequences of tax identity theft

Tax-related identity theft is a serious crime with severe legal consequences. Both individuals and businesses involved in filing fraudulent tax returns can face legal consequences, such as criminal charges, civil penalties, and long-term financial liability:

• Federal felonies. Charges commonly include 18 U.S.C. § 1028A (aggravated identity theft, mandatory two-year sentence), 18 U.S.C. § 287 (false claims), and various tax fraud statutes. Convictions can lead to up to 10 years in prison per count, six-figure fines, and restitution equal to the stolen tax refund.
• State charges. Many states have parallel identity theft and tax fraud laws, adding time to the sentence.
• Civil liability. Even when criminal charges aren’t pursued, the IRS can impose a civil fraud penalty equal to 75% of any underpayment. In some cases, victims may also pursue civil claims against negligent employers, tax preparers, or institutions that failed to protect their personal data.
• For businesses. Filing fraudulent payroll credits (e.g., Employee Retention Credit (ERC)) can trigger False Claims Act liability, treble damages, and debarment from federal contracts.

Signs that you're a victim of tax identity theft

Tax-related identity theft often goes unnoticed until something doesn't add up either with your return, your refund, or your official records. If you experience any of the following, it may be a sign that you’re a victim of tax identity theft:

• You receive a letter from the IRS flagging suspicious activity or alerting you to possible identity theft.
• Your e-file is rejected because a return has already been filed using your Social Security Number.
• You get a notice about a new IRS.gov or state tax account that you didn't create.
• An unexpected tax transcript arrives in the mail.
• You receive a bill or collection notice for a year in which you didn't file a tax return.
• Your refund is smaller or missing entirely and marked as “already paid.”
• Form 1099-G (unemployment benefits) arrives, although you were never unemployed.
• New or unfamiliar entries appear on your credit report shortly after tax season.

Steps to take if you're a victim of tax identity theft

If you’re a victim of tax identity theft, follow these steps to stop the fraud and begin restoring the recovery process:

1. Respond immediately to any IRS or state notice. Use the letter’s phone number or authenticated IRS.gov portal. Never click on links in unsolicited emails or texts.
2. Complete IRS Form 14039 (Identity Theft Affidavit). Mail or fax it with proof of identity (such as a driver’s license) following the instructions on the form.
3. Report the incident to the Federal Trade Commission (FTC) at IdentityTheft.gov. The site generates an FTC Identity Theft Report and a personal recovery plan. (To report identity theft in another language, call 877-438-4338.)
4. File a police report. Although not strictly required, having a police report can help when dealing with creditors, insurers, and credit bureaus.
5. Place a fraud alert or security freeze. Contact all three major credit bureaus. A fraud alert is free and lasts for one year; a credit freeze offers stronger protection and stays in place until you lift it.
6. Request an IRS Identity Protection PIN (IP-PIN). Once enrolled, every future tax return must carry your unique six-digit PIN.
7. Contact your state's Department of Revenue. Many states offer special PINs similar to the IRS IP-PIN program.
8. Track your case. Keep copies of all letters, fax receipts, and call logs. If delays exceed four months without an update, contact the IRS Identity Theft Victim Assistance unit or the Taxpayer Advocate Service.
9. Check for collateral damage. Review credit reports, medical benefit statements, and Social Security records for unauthorized use.

If you’d like to learn more, you can take a look at our guide on what to do if your identity is stolen.

Tips to protect yourself and prevent tax identity theft 

To stay safe from tax-related identity theft, safeguard your personal and financial information both when you're preparing your taxes and when tax season is over. Here are a few tips to protect yourself and prevent tax identity theft:

• Handle your SSN sparingly. Share it only when absolutely necessary and only with parties you initiate and can verify.
• File early. Submitting your tax return in January or early February leaves identity thieves less time to file first.
• Get an IP-PIN and renew it each January. The six-digit code must accompany every return filed under your SSN.
• Use strong, unique passwords and MFA everywhere. A password manager helps you generate complex passwords, store them securely, and protect access with biometric or multi-factor authentication.
• Enable a credit freeze year-round. With a freeze in place, thieves can't open new lines even if they have your SSN.
• Turn on dark web and data breach alerts. NordProtect's identity monitoring scans for leaked Social Security Numbers, tax IDs, and credentials, giving you early warning before criminals strike.
• Beware of unsolicited "IRS" calls or emails. The IRS initiates contact by mail and never asks for your personal or financial information by email, text, or social media.
• Protect documents that contain personal information. Store W-2s, 1099s, and prior-year returns in a locked drawer or safe. Shred them before disposal.
• Check your IRS online account annually. Review transcripts and address info for changes you didn't make.
• Consider an identity protection service. Services like NordProtect offer credit monitoring, breach alerts, and identity theft recovery if needed.
• Look into identity theft insurance. While it won't prevent fraud, it can help cover legal fees, lost wages, and the cost of restoring your identity if theft occurs.