Editor: Mindy Tyson Weber, CPA, M.Tax.
Practice & Procedures
Imagine a taxpayer who conscientiously makes all required estimated tax payments on time throughout the year, then prepares and files his Form 1040, U.S. Individual Income Tax Return, on April 14, expecting a refund of the overpayment shown on his return. Now, imagine the IRS has already processed a refund of those estimated payments and paid it to someone who used the taxpayer’s name and Social Security number to file a return on March 1.
This scenario is all too familiar to taxpayers who have had their identities stolen. Identity theft represents one of the most stressful events a taxpayer can experience. The Treasury Inspector General for Tax Administration (TIGTA) reported that the IRS identified more than 1.1 million incidents of tax identity theft related to 2011 returns (see TIGTA Rep’t Nos. 2012-40-050, 2012-42-080, and 2012-40-106, which examine IRS procedures for combating tax identity theft). Moreover, Beth Tucker, deputy commissioner for Operations Support, stated that for the first 10 months of 2012, the IRS protected, through enforcement efforts, close to $20 billion of revenue related to fraudulent refunds (see testimony of Beth Tucker to the House Committee on Oversight and Government Reform, Nov. 29, 2012).
Anyone can become a victim of identity theft. Personal information can be obtained by identity thieves through situations as ordinary as misplacing a wallet, smartphone, or other personal information. In other instances, identity theft results from sophisticated schemes perpetrated by experienced fraud artists. These scams can involve networks of pickpockets, widespread email phishing, thieves posing as someone needing information on the phone or via email, people going through victims’ trash, or thieves accessing information through unsecure websites. Recently, patient medical records have become prime targets of identity thieves since the patients are often tracked by Social Security number. This development underscores the importance of dealing with qualified medical practitioners and not providing personal identifying information (such as a full Social Security number) except when absolutely required.
Though it takes many forms, tax identity theft is usually discovered in one of three ways:
- Income reported to the IRS but not earned by the taxpayer: In this situation a thief uses the victim’s Social Security number to file a fraudulent Form W-2, Wage and Tax Statement , reporting wages and withholding taxes that were never paid or withheld. The fraudulent Form W-2 supports a fraudulent return showing a refund based on excess withholding. Actual withholding taxes may not have been paid, but the IRS or Social Security Administration is unlikely to match the withholding taxes with the payments until after the identity thief has already filed a fraudulent return to claim the refund.
- Multiple returns filed under one Social Security number: In this situation, the thief often files returns early in the filing season in an attempt to gain a refund of withheld taxes before the true taxpayer files his or her return.
- IRS notices or collection activity: The thief sends a fake notice to a taxpayer for a year in which the taxpayer did not meet the tax filing threshold and, thus, was not required to file a return.
When a taxpayer discovers that he or she has been a victim of tax identity theft, steps should be taken immediately. First, the victim should report the tax identity theft to law enforcement because a police report can help establish that identity theft occurred and provide support for the claim when contacting the IRS. Next, the victim should contact the three major credit bureaus and request the attachment of fraud alerts to the victim’s credit report. Then, the taxpayer should request that the IRS investigate the identity theft and take appropriate action to pay any valid tax refunds to the victim, correctly reflect overpayment credits to the proper tax year, abate erroneous penalty and interest assessments, and stop collection actions that have been erroneously directed against the victim.
Once contacted, the IRS will request evidence of the identity theft and evidence to confirm the taxpayer’s identity. Evidence of the identity theft can be established by filing Form 14039, Identity Theft Affidavit, or by providing a police report describing the theft. The IRS will also require the identity theft victim to provide authentication of his or her identity by submitting a copy of a valid U.S. federal or state government-issued form of identification.
Additionally, identity theft victims should file a report with the Federal Trade Commission (FTC). Although the FTC does not resolve individual identity theft claims, it monitors identity theft nationwide, and individual complaints can help the agency identify patterns of wrongdoing and support investigations and prosecutions. The FTC can be reached at 877-438-4338. This and other national monitoring helped identify Florida as one of the hardest-hit areas for identity theft, which in turn led to a joint effort among federal agencies that culminated on Oct. 10, 2012, with indictments against 40 defendants in 20 separate cases involving thousands of stolen identities and millions of dollars of fraudulent tax filings.
The IRS has established a special unit called the IRS Identity Protection Specialized Unit (IPSU), which can be reached at 800-908-4490. The IPSU has specially trained staff to assist taxpayers with tax identity theft issues and can be contacted directly if a taxpayer fears identity theft has occurred. The IRS will electronically mark a taxpayer’s account when identity theft has been reported. This electronic marker is viewable across various IRS departments and should expedite the resolution of numerous issues related to identity theft, refund processing, or penalty abatement.
Individuals whose accounts have been marked as subject to identity theft have also begun receiving identity protection personal identification numbers (IP PINs). Individuals use the IP PINs to file their tax returns for a given filing season. If a taxpayer has been issued an IP PIN but his or her return lacks the correct IP PIN, the return will be flagged and manually reviewed. The IP PIN procedure began in late 2011 as a trial program, with the IRS issuing approximately 54,000 IP PINs. For 2012, the number of IP PINs issued increased to 250,000, with a further increase to 600,000 expected for the 2013 filing season.
Despite account coding and flagging, the administrative difficulties for identity theft victims may not end quickly. As a matter of policy, the IRS will correct the address on the victim’s account only after the identity theft complaint is resolved. This can result in additional stress at a time when the victim remains uncertain of what impact the identity thieves have had on the victim’s accounts and what additional information has been compromised. Under this policy, it could be months before the address on record with the IRS is updated, and during this period important communications from the IRS could be sent to incorrect addresses. Also, stolen refunds are not retrieved immediately, and taxpayers routinely encounter delays.
For fiscal year 2013, the IRS has made identity theft a key emphasis area and plans to devote significant resources to prevention, protection, and prosecution. However, despite this allocation of resources, the IRS recently announced that combating identity theft represents only one of its major concerns. IRS budget constraints have affected manpower and resources. Most notably, the IRS has decreased resources allocated to the IPSU. Many believe this move will lead to more identity theft victims’ falling through the cracks and failing to receive adequate assistance.
If a victim thinks he or she is not being properly served by the IRS or the IPSU, assistance is available from the Taxpayer Advocate Service (TAS). If the matter is eligible for TAS assistance (as in the case of economic hardship caused by the theft), the TAS will assign a case advocate to the taxpayer’s account, with a goal of providing a holistic solution to problems that may involve multiple issues or multiple years. Involvement of the TAS should be sought proactively, early in the process, if refunds have been diverted or the IRS is pursuing collection of tax, penalties, or interest before it has established that tax identity theft has occurred.
Perhaps the best way to fight tax identity theft is to avoid becoming a victim in the first place. Although nothing affords complete protection from identity theft, a number of steps can be taken to protect personal information. To prevent theft schemes and scams, taxpayers should be aware of IRS practices.
The IRS does not initiate contact with taxpayers via email or social networking. Any website claiming affiliation with the IRS should have a web address that begins with www.irs.gov/. Taxpayers should not routinely carry or display their Social Security cards or provide full Social Security numbers at the request of vendors or service providers. Any personal identifying information on laptops, computers, smartphones, and similar devices should be password protected and safeguarded.
Periodic reviews of credit reports may reveal unexpected credit inquiries that should be investigated further. Taxpayers receiving IRS correspondence or notices that appear to be erroneous should immediately respond to the name and number printed on the notice or letter if they believe someone may have fraudulently used their Social Security number. Prompt investigation is usually the best course of action. Finally, tax preparers should ensure appropriate measures are taken to protect all clients’ personal information.
As the primary resource for many client questions on both tax and IRS procedure, tax advisers should understand the issues surrounding identity theft. By offering insight and recommending a course of immediate action during this stressful time, tax advisers can offer value that few others can provide. Although the IRS is making identity theft a high priority, taxpayers will continue to benefit from knowledgeable advisers who can navigate these troubled waters.
Mindy Tyson Weber is a director, Washington National Tax in Atlanta for McGladrey LLP.
For additional information about these items, contact Ms. Weber at 404-373-9605 or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with McGladrey LLP.