What tax refund fraud is

Tax refund fraud is when someone files a false tax return to the IRS or a state tax agency in order to steal a refund that doesn't belong to them. The most common form is identity theft refund fraud: a criminal uses your Social Security number and personal information to file a return in your name before you do, claiming a refund and having it sent to an account they control. The IRS then rejects your legitimate return as a duplicate.

Refund fraud can also happen when someone you know — a tax preparer, a family member, or a friend — deliberately inflates deductions, invents dependents, or hides income on a return they file for you, knowing the claims are false. Both the person filing and the person whose name is on the return can face criminal charges, though the person whose SSN was used is usually treated as a victim.

The IRS catches some fraud before refunds are issued. Many cases are discovered months later when the victim tries to file their own return and finds one already on record. State tax agencies have separate systems and can be defrauded independently of the federal return.

Key Takeaways

  • Identity theft refund fraud uses your Social Security number to file a false return and steal your refund before you file your own.
  • The IRS may catch fraud before issuing a refund, but many cases are only discovered when you attempt to file your legitimate return.
  • If your return is rejected as a duplicate, contact the IRS immediately and file Form 14039 to report identity theft.
  • Tax preparers who knowingly file false returns face criminal prosecution, and you can report suspected fraud to the Treasury Inspector General for Tax Administration (TIGTA).
  • Protecting your Social Security number, using strong passwords on tax software, and filing early in the tax season reduces your risk.

How identity theft refund fraud happens

A criminal obtains your Social Security number through a data breach, phishing email, public records, or by purchasing it on the dark web. They gather additional information about you — name, address, date of birth — often from the same breach or from social media. With this information, they file a tax return with the IRS or state agency, claiming a refund.

The return may include false W-2 forms (claiming wages from employers you never worked for), invented dependents, or exaggerated deductions. The criminal provides a bank account or mailing address they control as the refund destination. If the IRS does not catch the fraud before processing, the refund is issued to the criminal's account or address.

You typically discover the fraud when you attempt to file your own return and receive an error message stating a return has already been filed under your SSN. At that point, your legitimate return is held up while the IRS investigates.

Why the IRS struggles to stop it before refunds go out

The IRS processes millions of returns during tax season, and its fraud detection systems flag suspicious returns for manual review — but not all of them. A return claiming a refund of $2,000 with invented dependents might be flagged; a return claiming $800 with a single false W-2 might not be.

Early in the tax season, when fewer legitimate returns have been filed, a fraudulent return can slip through more easily because the IRS has less data to cross-check against. A criminal filing in early February may get a refund before employers have submitted W-2 data to the IRS, so the false W-2 claims cannot yet be verified as fraudulent.

The IRS also lacks real-time access to some data sources. It cannot instantly verify whether you actually worked for a company or whether a dependent is real. Verification happens after the refund is issued, which is why many cases are discovered weeks or months later.

What happens if your return is rejected as a duplicate

When you file your legitimate return and the IRS rejects it because one is already on file under your SSN, you will receive a notice explaining the rejection. Do not ignore this notice. Contact the IRS immediately at 1-800-829-1040 and explain that you did not file the earlier return.

The IRS will ask you to file Form 14039, Identity Theft Affidavit, which formally reports the fraud. You can file this form by mail or, in some cases, through your online IRS account. The form tells the IRS to freeze your account and investigate the fraudulent return.

After you file Form 14039, the IRS will contact you by mail with next steps. The investigation can take several weeks to several months. During this time, your legitimate return is held. Once the IRS confirms the fraud, the false return is removed from your record, and your legitimate return is processed.

Criminal penalties for filing false returns

Filing a false tax return is a federal crime. Penalties include fines up to $250,000 and prison sentences up to five years for tax fraud. If the fraud involves identity theft — using someone else's SSN — additional identity theft charges can add consecutive sentences.

A tax preparer who knowingly files a false return on behalf of a client faces the same penalties, plus potential loss of their tax preparer license and civil penalties from the IRS. The person whose name and SSN appear on the return — the victim — is not charged with a crime, though they may need to prove they did not authorize the return.

The IRS Criminal Investigation division (CI) handles prosecution of tax fraud cases. TIGTA, the Treasury Inspector General for Tax Administration, investigates fraud involving tax preparers and IRS employees. You can report suspected fraud to TIGTA at 1-800-366-4484 or online at tigta.gov.

Reducing your risk of refund fraud

Protect your Social Security number by limiting who has access to it. Do not carry your Social Security card in your wallet, do not post it on social media, and do not provide it to businesses unless they have a legitimate need. When a business asks for your SSN, ask whether they can use a different identifier instead.

File your tax return as early as possible in the tax season — ideally in late January or early February. The earlier you file, the less time a criminal has to file a fraudulent return under your SSN. If you use a tax preparer, choose one with a good reputation and verify their credentials through the IRS directory of tax professionals.

Use strong, unique passwords on your online tax software account and on any account linked to your tax filing (such as your bank account or email). Enable two-factor authentication if the service offers it. Monitor your credit report for unauthorized accounts opened in your name, which can signal identity theft beyond just tax fraud.

What to do if you suspect a tax preparer filed a false return

If you believe a tax preparer deliberately filed a false return in your name — inflating deductions, inventing dependents, or hiding income — do not sign the return. A return must be signed by the taxpayer to be valid. If you have already signed it, contact the IRS and file Form 14039 to report the fraud.

Report the preparer to the IRS at 1-800-829-1040 and to your state's tax agency. You can also file a complaint with the IRS Office of Professional Responsibility if the preparer holds a professional credential (such as CPA or Enrolled Agent). TIGTA accepts complaints about tax preparer fraud at 1-800-366-4484.

Keep copies of all communications with the preparer, including emails, signed agreements, and drafts of the return. These documents help the IRS and state investigators understand what happened and whether the preparer acted knowingly or made an honest mistake.

Frequently Asked Questions

How long does it take the IRS to resolve a fraudulent return?

The investigation typically takes two to six months, though complex cases can take longer. The IRS will contact you by mail with updates. During this time, your legitimate return is held and you will not receive your refund until the fraud is resolved and your return is processed.

Can I get my refund faster if I file Form 14039?

Filing Form 14039 does not speed up the investigation, but it is required to report the fraud and begin the process. Without it, the IRS will not investigate and your return will remain rejected. File the form as soon as you discover the fraud.

What if the fraudulent refund was already sent to a bank account?

The IRS will attempt to recover the funds from the account where the refund was deposited. If the money has been withdrawn, the IRS works with law enforcement to trace it. You are not responsible for repaying the fraudulent refund — the criminal is.

Can state tax fraud happen separately from federal fraud?

Yes. A criminal can file a false return with your state tax agency independently of the federal return. If you discover state-level fraud, contact your state tax agency directly. Each state has its own fraud reporting process and investigation timeline.

Will tax refund fraud affect my credit score?

Tax refund fraud itself does not directly affect your credit score. However, if the criminal uses your identity to open credit accounts or take out loans, that will damage your credit. Monitor your credit report and dispute any accounts you did not open.