Protecting Your Refund from Identity Theft and Offsets

Why protecting your refund matters

Tax refunds are targeted by criminals because refunds are large, fungible, and often processed automatically by the IRS. Separately, legitimate government offsets—deductions by the Treasury or IRS to collect federal or state debts—can reduce or eliminate a refund you expected. Both can cause financial disruption. In my 15+ years advising clients, a stolen refund or an unexpected offset is one of the most common shocks households face during tax season.

Authoritative sources: IRS Identity Theft Protect pages and the Treasury Offset Program explain the mechanics and remedies (IRS: https://www.irs.gov/identity-theft-fraud-scams; Treasury TOP: https://www.fiscal.treasury.gov/top/). The Consumer Financial Protection Bureau also offers practical advice on consumer protections and reporting (https://www.consumerfinance.gov/).

How identity theft and offsets actually work

• Identity-theft refund fraud: A criminal uses stolen personal information—typically a Social Security number (SSN), name, and birth date—to file a false federal tax return that claims a refund. Because many taxpayers receive refunds via direct deposit, thieves often change bank routing/account information or use prepaid card accounts.

• Identity verification and IRS flags: The IRS uses algorithms and verification letters (for example, Letter/Notice 5071C) to catch suspicious returns. When a return is flagged, the IRS may delay processing or ask the taxpayer to verify identity before releasing a refund (https://www.irs.gov/identity-theft-fraud-scams).

• Government offsets: The Treasury Offset Program (TOP) can reduce or take a refund to satisfy certain past-due debts (child support, federal student loans, unpaid state taxes or unemployment compensation debts, or past-due federal taxes). The creditor agency—not the refund processor—initiates the offset. The Treasury sends notices and produces a contact point for disputes (https://www.fiscal.treasury.gov/top/).

Key prevention steps you should take

1. File early, but file correctly

• Filing early reduces the window for a fraudster to beat you to the IRS. Make sure your return is accurate and complete; errors, missing forms, or mismatched information can trigger delays and identity verifications.

1. Get an IRS Identity Protection PIN (IP PIN)

• The IP PIN is a six-digit code the IRS issues to confirmed victims of tax-related identity theft and to taxpayers who enroll in the voluntary IP PIN program. When you have an IP PIN, the IRS will not process a return without it, which prevents someone from filing a return in your name. Apply through the IRS Get an IP PIN tool and follow the identity verification steps (https://www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin).

1. Secure your SSN and personal data

• Don’t carry your SSN card in your wallet. Share SSNs only when legally necessary. Shred documents with personal data. Limit details you post on social media.

1. Use strong account security

• Use unique passwords, a reputable password manager, and enable two-factor authentication on your email, tax software accounts, bank accounts, and any financial portals.

1. Protect your tax preparer relationship

• Work with a tax preparer who has a Preparer Tax Identification Number (PTIN) and uses secure client portals. Confirm how they store and transmit your information. A breach at a preparer can expose many clients at once.

1. Consider credit freezes and fraud alerts

• A credit freeze prevents new-credit accounts from opening in your name. A fraud alert makes lenders take extra steps to verify identity before issuing credit. Both are free and available at the three national credit bureaus (Equifax, Experian, TransUnion).

1. Monitor your accounts and credit reports

• Review bank and retirement accounts and check your credit reports at least annually (you can get free reports through AnnualCreditReport.com). Watch for unfamiliar accounts or inquiries.

1. Use secure connections and software

• Only use tax software from reputable vendors; update software and operating systems; avoid public Wi-Fi when transmitting tax information.

1. Choose direct deposit to a trusted account

• If possible, direct deposit refunds to an account you control (not to a preparer’s account). Watch for unusual direct-deposit routing changes.

If you suspect your refund was stolen or your tax identity was used

1. Act immediately: place a fraud alert on credit reports and consider a credit freeze.
2. Complete IRS Form 14039, Identity Theft Affidavit, if the thief filed a return using your SSN and the IRS tells you to submit this form. The IRS Identity Theft Central explains when to use this form and the verification process (https://www.irs.gov/identity-theft-fraud-scams).
3. Report the identity theft to the Federal Trade Commission at IdentityTheft.gov. The FTC provides a recovery plan and pre-filled letters for common steps.
4. File a police report if required by your state or if a financial institution demands one.
5. If the IRS sends an identity verification letter (for example, Letter 5071C), follow the instructions and use the secure IRS verification tools. If you can’t complete online verification, follow the alternate instructions in the letter.
6. Watch for IRS correspondence and respond quickly. Identity cases often require documentation and can take several months to resolve.

For detailed recovery steps on reclaiming a stolen refund, see our related guide: Handling Identity Theft-Related Tax Returns: Steps to Recover Your Refund (internal resource: https://finhelp.io/glossary/handling-identity-theft-related-tax-returns-steps-to-recover-your-refund/).

What to do if your refund is reduced or taken by an offset

1. Read the offset notice: If your refund is offset, you should receive a notice explaining the offset and the agency requesting collection. The Treasury’s TOP page explains types of debts that can be offset and how notices are issued (https://www.fiscal.treasury.gov/top/).

2. Contact the creditor agency: If the offset is for child support, contact the state child support agency; for student loans, contact the federal loan servicer; for past-due federal taxes, contact the IRS. These agencies are the right place to dispute liability or arrange repayment options.

3. Request a review or appeal: Each agency has an appeal process. For some programs you can request a review before the offset is finalized; for others, you may need to pursue administrative appeals or a collection due process hearing.

4. If you believe the offset happened in error because of identity theft, supply documentation promptly to both Treasury and the creditor agency. Keep records of all correspondence.

For common situations that trigger a refund hold or offset and how to release one, see our practical guide: Common Refund Holds, Why They Happen, and How to Release Them (internal resource: https://finhelp.io/glossary/common-refund-holds-why-they-happen-and-how-to-release-them/).

Practical examples and timelines (what to expect)

• Identity-theft cases often take months. When a fraudulent return goes through, the victim normally must file Form 14039 or respond to IRS identity-verification letters. The IRS may place a marker on the account and issue a paper return request or mail verification steps. Affected taxpayers may not get their refunds until verification is complete.

• Offsets can happen quickly near refund-processing time; once the Treasury receives offset instructions, the refund can be reduced in a single processing cycle. Recovering funds from an offset typically requires working with the creditor agency and can involve administrative appeals.

In a recent client case, an early filer protected their refund by enrolling in the IP PIN program after a prior breach; that IP PIN prevented a fraudulent return and avoided several months of recovery work.

Common mistakes to avoid

• Waiting to file: Filing late leaves a larger window for a criminal to file in your name.
• Sharing your SSN unnecessarily: Don’t give your SSN to unfamiliar parties.
• Ignoring IRS letters: Small notices can escalate into bigger problems if ignored.
• Using weak email/password security: Email compromise often leads to tax identity theft because tax-filing systems send password resets and sensitive documents to your inbox.

Quick checklist

• File early and accurately.
• Enroll in the IRS IP PIN program if eligible: https://www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin
• Use two-factor authentication for email and financial accounts.
• Place a credit freeze or fraud alert if you suspect identity theft.
• Monitor credit reports and bank statements.
• Keep copies of IRS notices and promptly follow instructions.
• If offset occurs, contact the creditor agency listed on the offset notice and document all communications.

Additional resources

• IRS Identity Theft Central: https://www.irs.gov/identity-theft-fraud-scams
• Get an IP PIN: https://www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin
• Treasury Offset Program (TOP): https://www.fiscal.treasury.gov/top/
• CFPB guidance on identity theft: https://www.consumerfinance.gov/
• FinHelp guides: Handling Identity Theft-Related Tax Returns: Steps to Recover Your Refund (https://finhelp.io/glossary/handling-identity-theft-related-tax-returns-steps-to-recover-your-refund/); IRS Identity Theft Protection PIN (https://finhelp.io/glossary/irs-identity-theft-protection-pin/); Common Refund Holds, Why They Happen, and How to Release Them (https://finhelp.io/glossary/common-refund-holds-why-they-happen-and-how-to-release-them/).

Professional note: In my practice I recommend clients enroll in the IP PIN program when eligible, pair that with strong account security, and keep copies of prior tax returns to speed verification if needed. Cases vary—some are resolved in weeks, others take many months depending on documentation and the agencies involved.

Disclaimer: This article is educational and not individualized legal, tax, or financial advice. For specific guidance, consult a qualified tax professional, attorney, or your servicer. Authoritative sources used include the IRS, the U.S. Department of the Treasury, and the Consumer Financial Protection Bureau.