Taxpayers eagerly awaiting their federal income tax refund should remain vigilant against a new scheme to steal their identities.

The Internal Revenue Service (IRS) has issued a warning about an email phishing scam that has been reported with increasing frequency during this tax season. The scam's objective is to steal the taxpayer's Social Security number and other sensitive information.

A number of people have reported receiving an email that appears to come from the IRS Taxpayer Advocate Service – a real agency. The email carries disturbing news.

“Your reported 2013 income is flagged for review due to a document processing error,” some of the messages read. “Your case has been forwarded to the Taxpayer Advocate Service for resolution assistance. To avoid delays processing your 2013 filing contact the Taxpayer Advocate Service for resolution assistance.”

Below the message is a link and instructions to click on it. Those who do are taken to a site that appears to be a page on the Taxpayer Advocate's website, but is really a dummy site constructed by the scammer.

Profitable scam

There they are instructed to enter all sorts of personal information. The IRS says this scheme is especially dangerous because stealing taxpayers' identities and filing bogus tax returns in their names has become a huge and profitable business.

In the most recent fiscal year the tax agency initiated 1,492 identity theft related criminal investigations. That amounts to a 66% increase over the previous year.

What's even more telling, perhaps, is the number of identity theft attempts the IRS says it has thwarted. The agency says that from 2011 through November 2013, the IRS has stopped 14.6 million suspicious returns, and prevented over $50 billion in fraudulent refunds from going out.

Refunds – not legitimate ones but bogus ones – are what the scammers are after. Armed with a victim's name and Social Security number, the thief produces a fake W-2 form and files a fake return that shows a sizable refund is due.

The scam is made easier by the IRS' preference for sending out refunds through direct deposit. In the past, in order to receive a paper check, the scammer would need an address – increasing their exposure and risk. They would also need a way to cash the check.

But with direct deposit, all the scammer need do is request a direct deposit for the refund onto a reloadable money card. After collecting the refund, the scammer disappears. The scam doesn't come to light until the victim gets around to filing their real tax return.

Drain on resources

The IRS is diverting more and more of its resources to dealing with taxpayer identity theft. In January the agency assigned 3,000 people to work on identity theft-related issues.

When criminals steal a taxpayer's identity and file phony returns with big refunds, it creates problems for both the government and the victim. The government gets scammed out of millions of dollars in bogus refunds that most likely can't be retrieved.

The taxpayer has to jump through numerous hoops to straighten out the mess and prove they are who they say they are. In the meantime, any legitimate tax refund to which they are entitled gets held up, usually for several months.

The IRS produced the video below to offer taxpayers some tips for protecting their identities and avoiding becoming victims.

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