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Identity theft occurs when someone uses your personal information such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes.
Usually, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund. Generally, the identity thief will use a stolen SSN to file a forged tax return and attempt to get a fraudulent refund early in the filing season.
You may be unaware that this has happened until you file your return later in the filing season and discover that two returns have been filed using the same SSN.

The IRS has expanded the number of Identity Protection Personal Identification Numbers (IP PINs) being issued to Identity Theft victims. The IP PIN is a unique identifier (6 numbers) that shows that a particular taxpayer is the rightful filer of the return.
In 2015, the IRS has issued IP PINs to more than 600,000 taxpayers who have been victimized by identity theft. That’s more than twice as many as the previous year.
The IP PIN will allow these individuals to avoid delays in filing returns and receiving refunds.

Go to the IRS website at http://www.irs.gov/Individuals/Order-a-Transcript to request a copy or transcript.

The scheme is named after Charles Ponzi who became notorious for using the technique in 1920.
In March 2009, Bernard Madoff pleaded guilty to 11 federal felonies and admitted to turning his wealth management business into a massive Ponzi scheme that defrauded thousands of investors of billions of dollars.
A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, instead of from profit earned by the individual or organization that is running the operation.
The scheme usually entices new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. Perpetuation of the high returns requires an ever-increasing flow of money from new investors to keep the scheme going

See Revenue Ruling 2009–9 and Revenue Procedure 2009-20.

If the taxpayer using the optional safe harbor provided in Rev. Proc. 2009-20 claimed a deductible theft loss in 2009 equal to 95% of the total qualified investment, reduced by amounts the taxpayer reasonably expects to recover from insurance or from the Securities Investor Protection Corporation (potential insurance/SIPC recovery, then the taxpayer does not have income in the current year under the tax benefit rule.
As the taxpayer properly reduced the deductible theft loss by the potential insurance/SIPC recovery in the year of loss, when those amounts are recovered in the current year the taxpayer does not have to report the recovery as income under the tax benefit rule.

If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost or stolen purse or wallet, questionable credit card activity or credit report, contact the IRS Identity Protection Specialized Unit at 800-908-4490, extension 245 (Mon. - Fri., 7 a.m. - 7 p.m. local time; Alaska & Hawaii follow Pacific Time).

Under a provision of law known as the tax benefit rule, a taxpayer must include in income the recovery of any amount deducted in a prior taxable year to the extent the prior year’s deduction reduced the taxpayer’s tax liability for that year (or created a net operating loss carryback or carryover

Whether a taxpayer who recovers amounts lost in a fraudulent investment scheme is required to include the recovery in income depends on whether the taxpayer claimed a tax deduction for the theft loss in any prior year.
A taxpayer who has not yet claimed a tax deduction for the theft loss is not required to include in income a recovery from the trustee or receiver. Instead, the recovery will reduce the amount a taxpayer may eventually claim as a loss.
A taxpayer who claimed a tax deduction for the theft loss, however, may be required to include the recovery in income, depending on the extent to which the theft loss deduction created a “tax benefit” for the taxpayer.

Special Rule for Combat Pay. Combat pay received by members of the military serving in Afghanistan, Iraq and other combat zone localities is usually exempt from tax.
But under a special rule, the taxpayer can choose to count all of this as taxable income when figuring the EITC. In many cases, making this choice enables the person to claim the credit, or if already eligible, claim a larger credit.