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Theft: The Tax and Financial Implications
Laura E. LaForgia, CPA, MST
By now, everyone is familiar with the phrase “identity
theft” and probably knows someone who has been hurt
in some way from it. Identity theft occurs when someone
uses your personally identifying information, such as your
name, Social Security number, or credit card number, without
your permission to commit fraud or other crimes. The Federal
Trade Commission (FTC) estimates that as many as 10 million
Americans have their identities stolen each year. Identity
theft can be especially devastating when it comes to tax
and finances, and it’s essential for CPAs to learn
the basics of how to avoid it, spot it and fix the situation
after it's happened.
The FTC states on its website that identity theft “can
wreak havoc with your finances, credit history, and reputation— and
can take time, money, and patience to resolve.” Most
people, however, overlook the ways that their personal
information is vulnerable to the eyes of criminals. It
is not merely an issue anymore of someone rummaging through
your trash or stealing your mail (although that is quite
common). Criminals have kept up with technology to continually
find new ways to steal your personally identifying information.
Unfortunately, society has not kept up with criminals in
blocking their schemes. Here are just a few of the vulnerable
and background checks
and dental files
and financial documents
The following are the kinds of techniques thieves can
use to steal identities, and tips to help you avoid them:
- Skimming – using
a device to read a credit card's magnetic strip. A
used as a retail
outlet to make purchases, or a device placed over the
normal card reader of an ATM, can steal your data when
to withdraw money. Tip: Keep your eye on your credit
card at all times. In addition, if an ATM or store
looks funny, don't use it.
- Phishing – emails
or phone calls designed to look like official messages
from companies that ask you to update
your account information. Tip: Think first, click
second. Who is this company or agency requesting information?
The email may say "state tax department" but
do the links actually go there? Generally, government
do not request sensitive information via email.
your address without your knowledge – your
mail, along with your personal information, is
redirected to the thief's location. Tip: Pay attention
mailing cycle of your bills.
your records from companies’ storage.
- Pretexting – pretending
to be you or someone else with the intention of obtaining
your personal information.
(A recent well known pretexting case involves
a woman arrested for pretending to be a relative of
a child killed in the
Newtown school shooting with the intention
to scam donors).
This is just the beginning. Fortunately, there is a wealth
of free resources available to the public. You can find
helpful information on the FTC
website. The IRS has a toll-free
line specific to this issue (800-908-4490). You can also
find good information from
the IRS as well as the Social
Security Administration (SSA). Both the IRS and SSA have
written publications on this topic: IRS
Theft Prevention and Victim Assistance, and SSA
Publication No. 05-10064ICN, Identity Theft and
Your Social Security Number.
Theft Emergency Response
soon as you suspect identity theft, you need to act very
quickly. Immediate action
not only stops a thief
from doing more damage but it may shorten the amount
of time it takes you to clean it up. Accountants can
not only use the information in the following paragraphs
to help themselves, but they can assist clients by
working with the relevant government agencies. In such
it’s often necessary for clients to fill out and
sign "power of attorney" forms.
Call your bank and credit card companies to alert them
of your suspicions. If there has been fraudulent activity
on your account, you will be required to complete an affidavit
of fraud and submit documentation.
Contact the fraud department of all three credit bureaus
to place an initial fraud alert on your credit reports,
which is good for 90 days. While the first credit bureau
you contact is responsible for notifying the other two,
you want to be certain. In some cases your credit card
company will have already called the credit bureaus,
but you should always confirm. You will also receive
a case number. The three credit bureaus and their contact
File a complaint with FTC, either online or by phone at
(877-438-4338). You will receive a reference number.
Once the identity theft has been confirmed, file a report
with local or state police. You will need the police
report to place an extended seven-year credit alert on
If there is indication that your driver's license is
being misused, contact your state's department of motor
vehicles (DMV) to complete a fraud report form. In New
York, this form is DMV Form FI-17. You must have evidence
of fraud to complete this form.
recordkeeping is very important during this long process
of cleaning up the damage. The easiest
way to stay organized
and have everything ready for fast access, is to keep
an organized binder with dividers. The front of the
binder should contain a daily log of all activity such
calls, emails sent and letters mailed, along with case
and reference numbers. Other sections of the binder
will include your credit reports, correspondences, and
evidence you gather.
The fraud alert of your account will slow down the perpetrators
until they eventually move on. Be patient with the process.
It is recommended that you sign up with a credit card service
to watch your credit account. You will then be able to
log on and review your records for unusual activity. In
the beginning of the ordeal, you will want to do this at
least daily. Sign up for alerts (delivered via text or
email) from the service to notify you when someone has
viewed your credit. (Companies do need your permission,
but some may find a way to do this illegally without permission.)
This is far more advantageous than waiting for new accounts
to appear on your report.
Remember, it is to your advantage to act
quickly. It could take as long as two weeks for a new
account to show up
on your credit report; however, if someone “views” your
credit, it will show up within two days. Note that your
normal creditors will periodically review your credit and
you will get these “good” alerts as well—don't
panic every time you receive an alert. If, however, you
are not familiar with the company viewing your credit,
it is worth a phone call to the company.
You can obtain valuable information for your case by monitoring
changes on your credit report. For example, after my identity
was stolen and my credit had a fraud alert issued, the
perpetrator did not give up easily. The perpetrator kept
trying to open accounts and file tax returns even after
the alert was issued. One daily alert indicated that a
particular bank had viewed my credit. I called the bank
and asked why they were looking at my credit. They notified
me that they did the financing for a motorcycle shop that
I had bought a motorcycle from the day before. I called
the shop and explained the situation to the manager. I
was able to get a description of the impostor, the ID that
she used, as well as exactly what information she knew
about me, such as employment. Had I waited, I may not have
received such clear information from him. Note that even
though I had a fraud alert on my account, the perpetrator
still walked away with a motorcycle while the loan was
being processed. The shop had poor internal controls in
place and learned a valuable lesson.
Are Your Rights as an Identity Theft Victim?
are not without recourse in the battle against identity
As the victim, you have the following rights:
place a 90-day initial fraud alert on your credit report.
place a seven-year extended fraud alert on your credit
receive a free credit report from each of the three
credit reporting companies.
dispute fraudulent information.
ask credit reporting companies and businesses to block
you are disputing from
appearing on your credit report.
get copies of documents used by the thief.
stop calls and letters from debt collectors.
obtain an identity protection personal identification
(IP PIN) from the IRS to use on
Everyone is entitled to receive a free
credit report once a year from each of the three credit
To get your free credit report, go to annualcreditreport.gov or call (877-322-8228). Do not contact each credit agency
separately—this is the official website to get the
legally mandated free credit report, and you will be asked
several questions to verify your identity. Be wary of using
any other website to order free credit reports as many
sites have strings attached to the "free." Unfortunately,
this website is a bit confusing to navigate, so be patient.
the e-file mandate phased in the last few years, tax
identity theft exploded. While electronic
efficiencies of processing tax returns and issuing
refunds, it allows criminals to benefit from gaping holes
security. It is fairly easy for a criminal to obtain
a real name and social security number, and file an
income tax return with a fake W-2 or business income
with intent to obtain a fraudulent refund that is deposited
right into the criminal’s bank account. Additionally,
if the victim happened to pay estimated tax payments
during the year that the criminal "forgot" to
include, the IRS or state agency will be happy to point
out the error and refund those payments to the criminal
as well. While you will not be held accountable for fraudulent
actions of others, it creates a time-consuming mess for
you to clean up.
If you have been the victim of tax identity theft, contact
the IRS. An agent will put you in touch with the IRS Criminal
Investigation Division which detects and investigates tax
fraud and other financial fraud, including fraud related
to identity theft. In addition, you will be asked to file
Form 14039, Identity Theft Affidavit.
After a scolding report from the U.S. Government
Accountability Office in late 2012, the IRS has expanded,
and will continue
to expand, their identity theft efforts. They currently
have more than 3,000 employees who work on identity theft
cases. They are also working on internal controls to decrease
the number of days it takes to resolve cases. For 2013,
the IRS’s expanded efforts include:
screening filters that spot fraudulent returns before
refunds are issued.
additional IRS criminal investigations.
a pilot program that allows state and local law enforcement
agencies in 50 states to obtain tax return
data from the IRS, with the victim’s permission,
and assist in investigations.
with more than 130 financial institutions to identify
fraud schemes and block fraudulent
Allowance of Truncated Taxpayer Identification Numbers
on some individuals’ payee
The IRS will now issue an IP PIN for identity
theft victims, as well as those who could be exposed
to identity theft.
The IRS flags your account and uses the IP PIN to make
sure your return isn’t being fraudulently filed.
Unfortunately, even with this new system, your refund will
still be held up for several months as the IRS sorts all
the information out. The IP PIN is only good for one year
and a new one will be issued each year for as long as the
account is flagged. Your IP PIN should obviously be kept
private. In addition, if you need to file an extension,
you will have to paper-file the extension.
Earlier this year, New York State tax department updated
its guidance on identity theft. It posted a
clear outline on its website on what to do in the event you are affected.
For example, if you are an actual victim, or suspect that
you are a potential victim, the NYS tax department advises
you to complete Form
DTF-275, Identity Theft Declaration and submit it with copies of your government issued ID,
proof of address, a statement explaining why you believe
you are a victim of identity theft, and any notice you
may have received from NYS.
is one of the fastest growing areas of crime, which can
include identity theft activities.
Crime Complaint Center (IC3), is a multi-agency task
force comprised of the Federal
Bureau of Investigation,
White Collar Crime Center, and the Bureau
of Justice Assistance. The IC3 serves as a central
hub, offering victims convenient and easy access for
complaints of internet crime and refers them to the
appropriate law enforcement agencies. Note that filing
with IC3 does not serve as notification to your credit
card company that you are disputing unauthorized charges—think
of this task force not as assisting in clean-up, but
as assisting in catching the crooks. They also indicate
on their website: “The confidentiality of the information
you provide may be affected by state law. As such, we
cannot guarantee that your complaint will remain confidential.”
On April 10, 2013, the Commodity Futures
Trading Commission (CFTC) and the SEC jointly issued
final rules and guidelines
that expand and clarify the SEC and CFTC’s responsibility
regarding oversight and enforcement of identity theft rules.
These final rules, which become effective May 20, 2013,
require certain investment advisors and regulated entities
to establish programs to address risks of identity theft.
These provisions were born out of the Dodd-Frank Wall Street
Reform. The importance of these rules can’t be overlooked.
Entities that fall under these rules must implement procedures
to detect and respond to identity theft red flags, as well
as train staff on identity theft policies and procedures.
This will help keep your tax and financial records from
the eyes of identity thieves.
As technology has advanced over the last several years,
identity theft has grown at an alarming rate. Identity
theft will continue to grow unless we keep ahead of the
thieves and continually modify and expand identity theft
prevention controls. While the IRS has taken steps to improve
efforts to fight tax-related identity thefts, it must continually
review and expand its policies in place, to keep up with
E. LaForgia, CPA, MST, is a partner at Marks Paneth & Shron
LLP, specializing in tax issues related to high net worth
individuals and family groups, as well as estates, trusts
and private foundations. She is a longtime member of
the NYSSCPA Trust and Estate Administration Committee,
is also a member of the National Association of Female
Executives and the Estate Planning Council of New York
City. In addition to her professional activities, she
volunteers her time with animal rescue groups. She can
at 212-710-6214 or firstname.lastname@example.org.