IRS Chief Counsel’s Office Issues Advice on Identity Theft Returns

The IRS Office of Chief Counsel explained in a memorandum to Small Business/Self-Employed Division attorneys what the IRS can do when a return is filed by an identity thief in order to generate a fraudulent refund and the IRS has issued a statutory notice of deficiency based on that fraudulent return (Program Manager Technical Advice 2012-13).

The PMTA first explained that a return filed by an identity thief is not a valid return because it is not filed by the true taxpayer or with the true taxpayer’s consent and it lacks a valid signature. This is a position the Office of Chief Counsel has taken in prior guidance.

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The Office of Chief Counsel then answered the following new questions:

1. Once the IRS issues a statutory notice of deficiency based on the identity thief’s return, can the IRS make adjustments to the victim’s account before the period to petition the Tax Court under Sec. 6213(a) (generally 90 days) expires?
2. Is the IRS required to rescind a notice of deficiency issued based on an identity theft return?

In answer to question 1, the Office of Chief Counsel explained that it had the legal authority to make necessary adjustments on the taxpayer’s account before the expiration of the 90-day period, including abating any assessments that were based on the bad return. The only exception would be if a necessary adjustment required an additional assessment on the victim’s account, but even in that case, the taxpayer could waive the restriction on assessment under Sec. 6213(a) so that the IRS could adjust the account immediately.

In answer to question 2, the Office of Chief Counsel stated that the IRS is not required to rescind a notice of deficiency and may not rescind one without the taxpayer’s consent. However, if the taxpayer establishes that he or she did not submit the bad return, then the issuance of the notice was an administrative error. In that situation, the IRS should rescind the notice if the taxpayer consents, especially because that will preserve the IRS’s ability to later issue a notice if a deficiency is discovered on the victim’s actual return.

The PMTA did not address other issues that arise when a notice of deficiency is issued based on a bad return, such as when the IRS changes the taxpayer’s address to match that on a fraudulent return and sends a statutory notice of deficiency to the false address. The real taxpayer would not receive the notice and would be unaware of the time he has to file a Tax Court petition.

The PMTA also did not address identity theft issues that arise when an individual (typically an undocumented worker) files a return using his or her name but someone else’s Social Security number or using both the name and Social Security number of another taxpayer, but where the items on the return represent the individual’s actual tax items and the return is not filed to generate a fraudulent refund but represents the individual’s attempt to comply with federal tax law.