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Protect Your Tax Refund from Fraudsters

If a crook files for your refund before you do, it could take months to sort things out and get your money. Take steps to make sure this never happens to you in the future.

February 12, 2015

Biggest IRS Tax Audit Red Flags

As tax-filing season heats up, tax-refund fraud has already reached the boiling point.

TurboTax made headlines when it temporarily suspended filing of state returns due to indications that a tsunami of fraudulent forms was being filed with the nation’s most-used tax software. The Wall Street Journal reports that a dozen TurboTax users told the paper that they had discovered that their federal returns had been filed using the software . . . but not by them. The FBI is investigating.

CALCULATOR: Set Your Withholding Right

State tax departments are on high alert. Wisconsin added a section to its tax website for residents to check whether someone else has already filed a return to claim their refund. Some taxpayers will be required to pass an identity quiz before they get their money. Vermont stopped processing thousands of returns as it tries to verify identities and says some taxpayers who request refunds be direct deposited to a bank account or loaded onto a debit card—the favorite choices of crooks—would be getting paper checks instead.


Refund fraud isn’t new, of course, but the crooks seem to be getting better at beating the system. The IRS estimates that in 2013 it paid out more than $5 billion in fraudulent refunds; that is, the fraudsters beat legitimate taxpayers to more than $5 billion. (The agency says it short-circuited another $25 billion in fraudulent claims.) It can happen to anybody. Just ask Attorney General Eric Holder. (The man who filed a return using Holder’s name and Social Security number was caught, pleaded guilty and sentenced to a year and a day in prison.) It can take months for honest taxpayers to straighten things out and get their tax refunds.

A foolproof way to protect yourself

With identity theft becoming more and more common, the primary advice for protecting your refund is to file early in hopes of beating the crooks to your money.

But we have a better idea, a surefire way to make sure you’re not a victim: Don’t put yourself in the position of asking for a refund in the first place.

That’s right: No refund means no chance of losing it to fraud.

Of course, we Americans love our tax refunds. Last year, the government sent out nearly 110 million of them. The average amount: $2,792.

Already this year, 7.5 million refunds have been issued, averaging $3,539.

But maybe the thought of losing your money to an identity thief and having to battle the bureaucracy to get it back will convince you to follow our long-standing advice to fix your withholding. If you don’t let the IRS dip too deeply into your paychecks, you won’t have a fat refund at risk next spring.

How to do it

The amount of income tax withheld for the IRS is controlled by the number of allowances you claim on the W-4 form on file with your employer (not the IRS). The more allowances you claim, the less tax is withheld. To change the amount taken from your checks, simply ask your company’s payroll office for a W-4 or download one here. Once you give a W-4 claiming extra allowances to your employer, withholding will drop and your take-home pay will soar. Consider it a way to start getting next year’s refund next payday.

Ah, but how do you know how many allowances to claim? Worksheets that come with the W-4 will help, and you can get detailed instructions in IRS Publication 505, "Tax Withholding and Estimated Tax". Or you can slog your way through the IRS's online withholding calculator.

But there’s an easier way. If your 2015 financial situation is likely to be similar to 2014's, take advantage of Kiplinger's Easy-to-Use Tax Withholding Calculator. We’ve updated the calculator for 2015. Answer three simple questions (you'll find the answers on your 2014 tax forms), and we'll estimate how many additional allowances you deserve. We'll even show you how much your take-home pay will rise starting next payday.

Your goal is to match withholding as closely as possible with what you’ll actually owe for 2015. The IRS can’t penalize you for underwithholding if you fall short by $1,000 or less. (Owing a small amount with next year’s return guarantees that you can’t be inconvenienced by an ID thief who files for a refund in your name. If the IRS pays a fraudulent refund, it’s not your problem.)

Our quick-and-easy method is a helpful guide, not gospel. As noted, it's based on the assumption that your financial life hasn't changed dramatically. If you have a new baby, get a new job or have an adult child who qualified as a dependent in 2014 but won't in 2015, for example, the calculator won't reflect how such events will affect your tax bill.

But for most Americans, our calculator will paint a reliable picture. That, in turn, should accomplish two important goals:

1) Get you motivated to grab a W-4 to pinpoint how many extra allowances you should claim; and

2) Get you more of your money as you earn it.

For years, we have called this a do-it-yourself tax cut for the 75% of taxpayers who habitually get refunds. From now on, we’re calling it our do-it-yourself tax cut and refund-fraud protection recommendation.

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