I interviewed Mike Prusinski of the award-winning identity theft protection service, LifeLock, to learn about how identity theft can happen when using tax software. What he told me was alarming, but there are ways to use tax software safely and keep your personal information secure.

Identity thieves are using Internet-based peer-to-peer networks (known as P2P) to collect the personal and financial information required to carry out identity theft.

P2P file sharing is used around the world to swap music, video and other files over the Internet. Three popular P2P clients are BitTorrent, Kazaa and Limewire.

Tax Software and Identity Theft

Prusinski offered an example of how a P2P network client and tax software installed on the same computer can lead to identity theft. Tax software will save data with the same default file name for every user of that particular tax software version across the United States. For example, last years' TurboTax default data file for anyone filing a Form 1040 was TurboTax 2009 Form 1040 Individual Tax Return. An identity thief could search within a P2P network for this file name on other computers that are on the network, and the data files could be stolen.

Don't Blame Tax Software

But, tax software is not the cause of identity theft. Identity theft expert Jake Stroup warns that tax-related identity theft can happen when using a trusted tax service. Doing your own tax return on paper and mailing it to the IRS isn't entirely secure, either, since each time your return passes through human hands, the threat of identity theft increases.

How to Prevent Identity Theft Through Tax Software

Here are tips Prusinski offered for preventing your tax data from being stolen, along with some of my suggestions:
Enter a unique file name instead of accepting the default when saving income tax data. For desktop tax software, don't just click on "OK" when prompted to save your data.

Take a moment to come up with a file name that would be meaningless to a potential identity thief and use it when you save. If you use online tax software, your data is not saved locally on your own computer, but you have the option of saving a copy of your tax return on your computer as a PDF. Enter your own file name instead of accepting the default for saving the PDF.

Don't save tax data files on your hard drive. Save your tax data file to a USB drive and then remove the USB drive from your computer when not using the tax software. Use the same procedure if you save a PDF of your tax return. Or, use online tax software.

Never use a P2P client at work. P2P network software installed on a work computer not only opens up the potential for having your data stolen, but opens the entire company's network to identity thieves, viruses and hackers. Avoiding this disaster is as simple as never installing a P2P software client on a work computer. Ever.

File taxes early. Once you've filed your tax return, any subsequent attempts to file will not be accepted by the IRS. If your identity is stolen, there is potential for the thief to file your return before you do, and you won't know until you receive a duplicate filing notice from the IRS.

Never visit a tax software website or special offer by clicking a link in an email. Always go to the site yourself by entering the URL (www.whatevertaxsoftware.com) in your browser. Prusinski also reminded me that the IRS never contacts taxpayers via email. Any email that appears to be from the IRS is a scam, do not respond to it in any way.

HTTPS can be a scam, too. For years, security experts have been advising people it's safe to log in at websites that start with HTTPS in the browser, which indicates a higher level of security than an average web site. However, identity thieves have been setting up secure servers to fool unsuspecting individuals. Avoid this kind of scam by never navigating to a tax software website from your email, or from another website. Enter the web address you want to go to directly into your browser.

Slow down. If something offered online or via email seems too good to be true, it probably is. Pay attention to any natural hesitation you have about responding to a tax software or tax preparation service offer.

Identity Theft: An Increasing Threat

Using these tips will help prevent identity theft. But, no matter how careful you are, identity theft is a crime that is on the rise. Services like LifeLock provide proactive services to protect members from identity theft by monitoring credit activity and criminal websites, including P2P networks. If an identity theft occurs, the service works with recovery experts to make all contacts necessary to straighten out your records and prevent further damage.
Learn more about the service in LaToya Irby's LifeLock review on About.com Credit/Debt Management.