Could credit freezes help protect at tax time?

• The IRS is suggesting that people consider credit freezes or alerts to combat tax-refund fraud
• Credit freezes block access to consumer credit reports, discouraging lenders from opening accounts
• It can be a hassle to remove a freeze anytime you need a loan or apply for a job or utility service

Identity theft is a real and growing risk for taxpayers. A crook could might file a fraudulent return in your name before you can file a legitimate return. If so, that person could steal your refund.

Taxpayers eventually would get their money, but delays can take half a year or more and represent a major hassle. It's ideal to avoid falling victim in the first place.

So perhaps it might be wise to place a credit freeze or fraud alert as defensive measures.

Credit freezes, also called security freezes, can be smart moves in some situations, as they generally restrict access to your credit report. Since lenders often won't issue loans or open credit accounts without examining your credit report first, this discourages accounts from being opened in your name. It can make sense if you don't expect to apply for credit anytime soon, especially if you live with a caretaker, questionable roommates or dishonest relatives.

All states allow consumers to initiate credit freezes, at costs ranging from free to up to $10 or $15, depending on the state and the situation.

Freezes are different from fraud alerts — messages contained in your credit report indicating that fraudulent activity might have occurred. Alerts might not restrict your ability to get a loan, but creditors are supposed to take extra steps to verify your identity before opening accounts.

Freezes and alerts are two defensive tools that might prove helpful at tax time. The Internal Revenue Service said as much in a  Dec. 28 tax tip focused on refund fraud.

"This critically important step makes it harder for identity thieves to open additional financial accounts, such as a bank account, in your name," the IRS said of fraud alerts. "This helps prevent identity thieves from directing fraudulent tax refunds into bank accounts they created or opening additional credit cards in your name."

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You can place a credit freeze by contacting the three main credit bureaus. They are: Equifax (1-800-349-9960), Experian (1-888-397-3742) and TransUnion (1-888-909-8872). For alerts, go to Equifax.com/CreditReportAssistance (1-888-766-0008), Experian.com/fraudalert (1-888-397-3742) and TransUnion.com/fraud (1-800-680-7289).

Of the two, freezes are more effective than alerts, said Adam Levin, chairman of Identity Theft 911 and author of "Swiped," a book on ID theft. In fact, he questions how effective fraud alerts are these days, given all the breaches that have occurred in recent years — and all the breach fatigue that has resulted. As noted, creditors are supposed to take extra precautions before opening accounts when they spot an alert in a person's credit report.

"It's also in their best interest to check further, but that doesn't mean they will," Levin said.

Deposit accounts don't show up on credit reports since there's no credit involved. But the existence of other problems on your credit report could suggest that your information has been compromised and, possibly, that a tax scammer has you in sight. That's why it's important to peruse your credit reports periodically for suspicious activity. For a free copy, go to annualcreditreport.com, which is operated by the three credit bureaus, or call 1-877-322-8228.

But freezes won't protect against all fraudulent activity, and they aren't suitable for everyone. You likely would need to lift a freeze temporarily whenever you apply for credit cards, a mortgage, a job, an apartment, buy insurance or seek utility service. Depending on state laws, you could face a modest fee each time you lift a freeze and might have to wait a week or two while a request is processed.

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Given the effort and cost involved, most people probably wouldn't want to place a freeze or alert just to protect their tax refund. While the dangers are growing, the vast majority of taxpayers won't fall victim in a given year. And, as noted, victims eventually receive their refunds.

Mike Sullivan, a spokesman for Phoenix debt-counseling firm Take Charge America, doesn't believe a freeze would be all that helpful to most people at tax time if the goal is to prevent a refund being diverted to an unauthorized bank deposit account. However, if a thief snags your tax refund, he or she would have your Social Security number, too. In that case, a freeze might stop crooks from doing further damage, Sullivan said.

Levin agreed.

"If they have your information and  file a tax return under your Social Security number, you can bet they'll try to use it for more than that," he said.

Freezes and alerts thus should be viewed as part of a comprehensive strategy, not tactics focused solely around tax refunds.

Reach the reporter at russ.wiles@arizonarepublic.com or 602-444-8616.

Tax-fraud fallout

The growing incidence of tax-refund fraud can affect taxpayers in a couple of ways. The obvious one involves the actual theft of a refund.

"If an identity thief has filed a false return on which the IRS has paid a refund, the IRS will automatically freeze the return later filed by the legitimate taxpayer," noted the Taxpayer Advocate Service in a report. According to the service, an independent watchdog division within the IRS, these cases are resolved in about six months on average before the legitimate taxpayer receives his or her rightful refund.

Second, and  less obvious, the IRS also runs many returns through "filters" in an attempt to spot suspicious ones. The IRS stopped 1.56 million returns last filing season through April 23, 2015, or more than double the 764,000 returns stopped during a similar period in 2014. More than one-third of stopped returns came from legitimate filers. "Thus, more than 600,000 taxpayers who filed legitimate returns had their returns frozen as suspicious and had to take additional steps to receive their refunds," said the Taxpayer Advocate Service.

Arizona bolsters credit-freeze law

A change to an Arizona law expands the ability of consumers to implement credit freezes, essentially by broadening coverage for "protected persons."

As before, consumers may request a security freeze on their own credit reports and credit scores, and temporarily or permanently lift those freezes when they want. Among various details, Arizona law requires credit-reporting agencies to comply within 10 business days of receiving a written request, and they must provide each consumer with a unique identification number or password for use in temporarily lifting or permanently removing a freeze.

A security freeze doesn't restrict third-party access to a person's credit report in all cases. For example, government agencies may access reports if seeking child-support payments or overdue taxes, according to Arizona Attorney General Mark Brnovich. His office offers details of the law in a question-and-answer section at https://www.azag.gov/identity-theft/security-freeze.

Mike Sullivan, a spokesman for Phoenix debt-counseling company Take Charge America, said the revised Arizona law, adopted last year and now in effect, could be helpful for parents seeking to implement credit freezes for children younger than age 16. Other possible uses would allow conservators or guardians to initiate or remove credit freezes on behalf of incapacitated individuals under their oversight, such as elderly parents.

The Arizona law change requires credit bureaus to follow a process for freezing credit reports, and lifting freezes, when requested by authorized representatives of protected persons, Sullivan said. "It's a step in the right direction," he said. "I hope it will become routine for parents to do this."

According to the Arizona Attorney General's Office, requests to place freezes must be done in writing, via certified mail, to each of the three main credit bureaus at the following addresses:

Equifax Security Freeze
PO Box 105788
Atlanta, GA 30348

Experian
PO Box 9554
Allen, TX 75013

TransUnion Security Freeze
PO 6790
Fullerton, CA 92834

For details of the law, refer to Arizona Revised Statute 44-1698.02.

— Russ Wiles