First a Victim of Tax Return Identity Theft, Then a 2-Year Wait for a Refund

Federal income tax refunds usually appear in bank accounts less than three weeks after the government accepts a return — unless you’re the victim of tax return identity theft. In that case, it often takes about two years.

That’s right. If a thief files a fraudulent return using your tax information and pilfers your refund, you’ll have to wait an average of 675 days to get the money rightfully owed to you, according to the Taxpayer Advocate Service, a group within the Internal Revenue Service that works on behalf of taxpayers.

“That period of time is just ridiculous,” Erin M. Collins, who leads the service, said in an interview.

For reasons not yet clear, Ms. Collins noted, many of those affected are lower-income tax filers, who often depend on tax refunds to cover basic living costs. Those filers often qualify for tax breaks for working families, like the earned-income tax credit, that can result in significant refunds.

“These are true victims,” Ms. Collins said. “The I.R.S. should be helping these people.”

About half a million tax returns are in limbo at the I.R.S. because of identity theft fraud, a spokesman for the Taxpayer Advocate Service said.

Here’s how tax identity fraud works: Criminals use tax filers’ personal information, including their Social Security number, to file a fraudulent return and then ask that it be sent to their own bank account. The thieves usually file early in the tax season, often before the legitimate filer has submitted a return.

When the unknowing taxpayer eventually submits an electronic return, the I.R.S. system rejects it as a duplicate and alerts the taxpayer to the problem. Filers must then submit a special identity theft affidavit and file a paper return by mail.

Then, they wait.

“Taxpayers should brace themselves for delays,” Ms. Collins wrote in a recent blog post. She added, “At the risk of vast understatement, 22 months is unacceptable.”

In an emailed statement, the I.R.S. said that “although taxpayers continued to see major improvements from the I.R.S. during the 2024 tax season, the I.R.S. recognizes that the backlog of identity theft cases remains one of the most significant ongoing service gaps.”

The agency said that while such cases were often complex, it was working to provide faster service to victims. Because of increased funding from the Inflation Reduction Act, the agency added, it “is now in a better position to resolve cases in a timelier manner.”

Ms. Collins flagged the snail-like processing pace in January in her annual report to Congress for 2023. Last fall, she said, the average wait was 19 months. But the problem worsened during this year’s tax filing season.

Because replacement returns are filed on paper, she said, they take longer to review. The problem initially began when I.R.S. offices shut down during the pandemic. And while the I.R.S. has hired more people in the past year, personnel were redeployed during tax season to answer customer service phone lines. So review of identity theft returns lagged behind.

Scrutiny is necessary, Ms. Collins said, since the I.R.S. has typically already paid a tax refund on the fraudulent filing and must perform “due diligence” before paying it twice. But delays in clearing identity theft returns have become “unreasonable,” she said.

The agency “should be able to figure out how to provide taxpayers with the customer service they need without siphoning it from other critical programs,” she said in her annual report, which cited identity theft as one of the most serious problems taxpayers face when dealing with the I.R.S. (The agency had mostly eliminated its backlog of legitimate paper-filed Form 1040s by the end of last year, the 2023 report noted.)

The lengthy processing time for identity theft returns can cause other problems, Ms. Collins said in the blog post, like difficulty applying for a mortgage. When taxpayers are flagged for identity theft, she said, the I.R.S. won’t send tax transcripts — a record of the filers’ income and tax information — directly to lenders. So taxpayers have to request the transcripts themselves and give them to the lender. The red tape delays the completion of their home loan applications.

Other issues can arise, such as when a taxpayer chooses to have a refund applied to a subsequent tax year but the I.R.S. hasn’t yet applied it because of an unresolved identity theft issue. The tax owed on the subsequent year then goes unpaid, and the I.R.S. system begins to send collection notices. (Identity theft victims can call the I.R.S. at 800-908-4490 to ask the agency to put a code on their accounts to stop the collection letters.)

Tom O’Saben, director of tax content and government relations for the National Association of Tax Professionals and a tax preparer in Illinois, said he had clients this year who were unable to file a return electronically claiming their daughter as a dependent because the I.R.S. had flagged her Social Security number for possible identity theft.

Here are some questions and answers about tax refund fraud:

How can I protect myself against tax refund fraud?

Both Ms. Collins and Mr. O’Saben recommended applying to the I.R.S. for an “identity protection pin,” or IP pin, a six-digit number that blocks someone from filing a tax return using your Social Security number. (If the return doesn’t have the filer’s pin number on it, the I.R.S. won’t accept it.) Originally, the pins were reserved for victims of identity theft, but anyone can now request one as a preventive step. Once you have a number, the I.R.S. issues you a new one each year.

If you are already a victim of tax return identity theft, the I.R.S. automatically issues an IP pin once it resolves your case. (But you don’t have to wait, the advocate’s office said. You can apply for one while your case is in progress.)

Getting an IP pin, however, can also take time, depending on whether you apply online, by mail or in person. (Ms. Collins’s annual report said some taxpayers might find the online process “burdensome.”) Filers may have been reluctant to participate because previously, if you had requested a pin voluntarily, you couldn’t later change your mind and opt out. But that has changed, the I.R.S. website says. If you have not been a victim of tax-related identity theft, you may now opt out of the pin program.

Melanie Lauridsen, vice president for tax policy and advocacy with the American Institute of Certified Public Accountants, advised working with a reputable tax preparer and having your tax information well organized so you can file early in the season, reducing the odds that a fraudulent return will be filed first. “Give it to the preparer in a timely manner,” she said.

Other steps, including putting a fraud alert or security freeze on your credit report, can also help protect sensitive information that can be used in identity theft.

How do criminals get personal information to use in tax return fraud?

Data breaches or leaks, which have become numbingly common, can expose sensitive information to identity criminals. In 2023, there were 3,205 publicly reported data compromises — at health care providers, cable and cellphone companies, mortgage lenders, and other businesses — affecting more than 353 million people, a 78 percent increase from 2022, according to the Identity Theft Resource Center, a nonprofit group that tracks breaches and assists victims. “They are the fuel for fraud,” said Eva Velasquez, the group’s chief executive.

In some cases, criminal networks are behind the data compromises. In a case filed in Texas last year, the federal authorities charged seven people with fraudulently registering with the I.R.S. as taxpayer representatives and obtaining personal information on filers, which they then used to submit hundreds of fraudulent tax returns and obtain illegal refunds. All seven have pleaded guilty to the charges.