[IMGCAP(1)]If you’re in the tax preparation business, chances are you’ve had a client experience tax-related identity theft.
With the 2015 tax season in full swing, there is no doubt this trend is continuing. Most states have slowed the state refund process as they work to combat identity theft, and the IRS has issued numerous alerts on tax scams that have taxpayers wary. The most recent alert by the IRS indicates a 400 percent increase in email tax scams this filing season over the last filing season.
With so many issues to tackle, the process of assisting victims is a slow one. As of May 2015, the IRS had 671,773 open identity theft cases, with just over 3,000 trained employees dedicated to working directly on these type cases while in the process of training 35,000 employees to be on the front-line to troubleshoot and direct victims in recognizing and reporting identity theft. Further, according to a Treasury Inspector General for Tax Administration audit, the IRS is taking an average of 278 days to resolve identity theft cases rather than the 180 days they have publicized.
From understanding how tax-related identity theft is identified to the ways it can be reported, it’s important that tax practitioners know how to effectively and efficiently guide clients through the process to best support them in their time of need.
Identifying Tax-Related Identity Theft
First, let’s start with the basics. Tax-related identity theft occurs when someone files a fraudulent tax return using another person’s tax identification number to obtain refund. The IRS has two ways to detect identity theft on filed tax returns:
1. Identity Theft Filters – At Filing
Identity theft filters are applied to all tax returns at processing. If a return gets stopped by one of the filters, a letter is generated and mailed to the taxpayer requesting identity verification or additional information to process the return. The problem with this approach is that of the 3.8 million returns that were suspended by identity theft filters last year, 34 percent were false positives, according to the National Taxpayer Advocate report to Congress on the 2015 filing season. This indicates that at least one out of three returns were falsely suspended, causing not only a delay in issuing the taxpayer their refund, but understandably, frustration.
2. Suspicious EIN listings – Post Filing
When IRS examiners screen filed tax returns for fraud potential and identify a particular EIN that has been used to report false income and withholding, the examiner performs extensive research to locate the employer. If the employer is determined to be a fictitious business, the EIN is designated as suspicious. To detect identity theft; this suspicious EIN listing is used by the IRS to identify tax returns that have income reported using those EINs. If a return is identified as using a suspicious EIN to report income, the IRS sends a letter to the real taxpayer informing them of such. To date, there have been over 6,000 EINs confirmed suspicious.
The other way potential tax-related identity theft is uncovered is if a taxpayer suspects it. Suspicious scenarios include:
• Questionable items on a client’s tax account transcript
• Receipt of an IRS notice for underreported income or fictitious employees
• Experiencing an unusual delay in receiving a refund
• E-file rejection indicating a duplicate return filing
• IRS acceptance of original paper filed return as amended
• Receipt of a letter from the IRS indicating balance due, refund offset, or collection actions taken against the client, and no return was filed or refund was received
• Personal information compromised in a data breach, wallet or purse stolen, or client believes they are a victim
It’s also important to note that most victims of tax-related identity theft are children, the elderly, deceased individuals and people who are in prison. Why? Because these individuals may not have a filing obligation or file a tax return, so the thief’s tax return is the first one filed with the IRS—and there is no duplicate return or Social Security number to kick out the fraudulent return.
Reporting Tax-Related Identity Theft
In general, all individuals or businesses should take immediate steps to report identity theft as soon as they become aware they are a victim. If they received an IRS notice that identity theft is suspected, instruct them to immediately contact the phone number listed on the notice and follow the instructions to verify their identity.
If you or your client suspects they are a victim of tax-related identity theft, they should contact the Identity Protection Specialized Unit (IPSU) at (800) 908-4490. If they are unable to reach the IRS by phone due to disconnects or long hold times, instruct them to prepare and submit Form 14039 with supporting documentation and mail or fax it accordingly.
If all else fails, direct them to contact the Taxpayer Advocate Service (TAS) by visiting their local office or calling National TAS at (877) 777-4778.
Combating Tax-Related Identity Theft
One of the ways the IRS is combating identity theft is by placing identity theft markers on taxpayers’ accounts. This program began in 2009, and to date, the IRS has placed theft markers on millions of accounts.
Practitioners can determine if one of these markers is on a client’s account via tax account transcripts requested through TDS or directly from the IRS through the PPS line. On the transcript, the identity theft indicator is marked by Transaction Code (TC) 971 Action Code 522 and various tax administration codes that describe where the IRS is in the resolution process.
Additionally, starting this year, the IRS is requiring the use of Identity Protection PINs for all Social Security numbers with an IP PIN requirement, regardless of whether the Social Security number is entered for a primary, spouse, or dependent/qualifying individual. IP PIN entry is required on Form 1040, Form 2441 and Schedule EIC. An IP PIN for a dependent will only be issued if the dependent’s social security number has been used as a primary or secondary on another tax return. Otherwise, the IRS will not issue IP PINs to dependents.
Additionally, numerous data elements from tax return submissions will be shared with the IRS and states by tax software companies. Tax software companies are also enhancing the identity requirements and validation procedures incorporated into their software in an effort to further combat tax-related identity theft.
Requesting a Copy of the Fraudulent Return
New this year is the ability of a victim of identity theft (or a person authorized to obtain the identity theft victim’s tax information) to request a redacted copy of the fraudulent return that was filed. With this information, victims can determine the tax impact of the information reported by the thief on the bad return.
Due to federal privacy laws, the victim’s name and Social Security number must be listed as either the primary or secondary taxpayer on the fraudulent return; otherwise the IRS cannot disclose the return information. For this same reason, the IRS cannot disclose return information to any person listed only as a dependent.
Representing a Victim of Tax-Related Identity Theft
In summary, follow these basic steps when representing a client who has been a victim of tax-related identity theft:
1. Confirm the identity theft incident with your client.
2. Consider obtaining a written engagement agreement.
3. Secure Form 2848, Power of Attorney.
4. File identity theft complaints with FTC, local law enforcement and major credit bureaus.
5. Report the identity theft to the IRS.
6. Address related IRS compliance issues.
7. Monitor the situation by checking transcripts and credit reports and bank and credit card accounts frequently.
8. Review these IRS Publications for Safeguarding Taxpayer Information and Data:
a. Publication 4600 – General information about requirement and what to do in the case of a data breach
b. Publication 4557 – Checklists and example security plan
Because there is no doubt that these types of crimes will continue for the foreseeable future, it is important for practitioners to understand how best to serve these clients in their time of need. To help prevent and detect identity theft early on in all its forms, assist your client in adhering to these guidelines:
1. Review and read statements carefully noting any suspicious items.
2. Know payment due dates.
3. Read health insurance plan statements—and make sure care received matches the statement.
4. Shred personal documents.
5. Review your credit report once a year.
6. Monitor tax accounts transcripts on a regular basis and review before filing the tax return.
7. Watch out for tax scams that appear to be real.
Trenda B. Hackett, CPA, currently serves as a technical editor/author of PPC products for Thomson Reuters Checkpoint within the Tax & Accounting business of Thomson Reuters. A member of the AICPA and TSCPA Relations with IRS Committee, she has over 25 years of experience in tax and accounting. Prior to joining Thomson Reuters, she spent over 15 years with the IRS as a Revenue Agent. She has significant experience in tax preparation and representing clients before the IRS as well as product development for the GoSystem Tax partnership product. She is a contributing editor to Checkpoint IRS Response Library and coauthor of PPC Guide to Tax-Related Identity Theft.