Tax-related identity theft is the use of the personal identifying information of another person to file a false tax return for the purpose of obtaining a fraudulent refund. Quite often, taxpayers first become aware that their identity has been stolen when they attempt to electronically file their tax return. Tax preparers are on the front lines, as indicated by the 2015 tax software survey. More than half of survey participants experienced minor problems with e-file rejections due to identity theft, and another 11% reported significant problems.
In its 2016 “Objectives Report to Congress,” the Taxpayer Advocate Service reported that the IRS stopped processing more than 3.8 million suspicious tax returns as of May 31, 2015, and almost 700,000 identity theft cases were still open as of that date. It can take six months to one year for the IRS to resolve identity theft cases; unfortunately, more than 20% have been closed prematurely.
The high levels of identity theft occurrence followed by slow resolutions make it imperative that tax practitioners and taxpayers know what resources are available to them.
Identity Theft Resources
IdentityTheft.gov (http://www.identitytheft.gov) is a good place for CPAs to start. It provides checklists that allow users to select steps or issues and drill down to further resources and external links. The stages for resolving tax-related identity theft include calling the IRS right away if an IRS notice was received, and completing IRS Form 14039, “Identity Theft Affidavit.”
The information on reporting a misused Social Security number contains links to the online application for a new card. Sample letters are available for communicating with credit card companies, obtaining records about the identity theft, and dealing with debt collectors.
The Federal Trade Commission Consumer Information webpage on identity theft (http://www.consumer.ftc.gov/features/feature-0014-identity-theft) offers community resources, such as brochures on “Identity Theft: What to Know, What to Do” and “Identity Theft: What to Do Right Away.” The FTC also offers a 68-page book, Taking Charge: What to Do If Your Identity Is Stolen, that provides detailed information on how identity theft occurs, how to reduce risk, and how to address the problems that arise, including sample letters, an identity theft victim's complaint and affidavit form, and an annual credit request form (https://bulkorder.ftc.gov/system/files/publications/pdf-0009-taking-charge.pdf).
The FTC also provides a tax-related identity theft web page, although the tax-related information can also be accessed under the general identity theft materials (http://www.consumer.ftc.gov/articles/0008-tax-related-identity-theft).
The IRS Identity Protection: Prevention, Detection and Victim Assistance webpage (https://www.irs.gov/Individuals/Identity-Protection) aggregates IRS materials for taxpayers and tax preparers. Publication 5027, “Identity Theft Information for Taxpayers,” is a handy one-page PDF explaining the warning signs and steps to take regarding identity theft. Publication 5199, “Tax Preparer Guide to Identity Theft,” is similar, but provides links to additional resources.
Larger publications provide more detailed information for tax preparers. For example, Publication 1345, “Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns,” is a 60-page guide for electronic return originators that addresses implementing security and privacy standards, safeguarding the e-file system from fraud and abuse, and verifying taxpayer identification numbers, as well as including all of the practical policies and procedures of the e-file program (https://www.irs.gov/pub/irs-pdf/p1345.pdf). Publication 4557, “Safeguarding Taxpayer Data,” a 12-page booklet that explains how to protect taxpayer data and report breaches, includes a thorough checklist plus links to standards and best practices.
The IRS website provides additional useful information elsewhere, easily located with keyword or publication searches. For example, Announcement 2015-22, “Federal Treatment of Identity Protection Services Provided to Data Breach Victims,” notes that receipt of identity protection services following a data breach is not taxable (https://www.irs.gov/pub/irs-drop/a-15-22.pdf). Information Release IR-2015-117 and Fact Sheet 2015-23 provide details on the public-private partnership known as the Security Summit, which was formed to develop methodologies to detect and prevent identity theft.
The Treasury Inspector General for Tax Administration (TIGTA; http://www.treasury.gov/tigta) offers a useful two-page brochure, “Victim Assistance Related to Identity Theft” with a listing of 10 contacts, from the IRS Identity Protection Specialized Unit to the National Organization for Victim Assistance (https://www.treasury.gov/tigta/docs/Victim%20Assistance%20Related%20to%20Identify%20Theft.pdf). The easiest way to find TIGTA's information on identity theft is to pull up the press releases under the Publications link. The website includes a dedicated contact page to report the impersonation of an IRS representative—scams which have cost taxpayers over $14 million in the past two years (https://www.treasury.gov/tigta/contact_report_scam.shtml).
TIGTA's “Results of the 2015 Filing Season” is a downloadable 34-page report that covers several key areas of focus, such as the effect of tax law changes on the 2015 filing season, comparative statistics for 2015 and 2014, and an analysis of key tax provisions for 2015. The document discusses the decline in the number of confirmed identity theft returns from 380,000 in 2013 to 140,000 as of April 30, 2015. The reason for the decline is the stronger rejection filter that prevents suspicious returns from being processed. This is good news for the general public, but bad news for any taxpayers whose truthful tax returns were rejected (https://www.treasury.gov/tigta/auditreports/2015reports/201540080fr.pdf).
The Social Security Administration (http://www.ssa.gov) offers an eight-page downloadable brochure (SSA Publication 05-10064), “Identity Theft and Your Social Security Number,” that describes common tactics for stealing Social Security numbers, how to review work history with the SSA to check for false wage reports, and contact information for several organizations. Most importantly, the brochure explains when and how to apply for a new Social Security number (http://www.socialsecurity.gov/pubs/EN-05-10064.pdf).
The Identity Theft Resource Center (http://www.idtheftcenter.org) is a nonprofit that provides no-cost assistance for victims of identity theft. The ITRC website offers victim help, identity theft protection tips, and consumer information. The organization also strives to educate individuals and businesses, and promote best practices for fraud and identity theft detection, reduction, and mitigation through the use of articles, surveys, and white papers. The website materials include an extensive collection of fact sheets and tip sheets, with links to further information. The ITRC also offers a free ID Theft Help mobile application for both iOS and Android that provide much of the website's information, as well as connects users to ITRC advisors (http://www.idtheftcenter.org/itrc-app.html).
Due Diligence
While the AICPA's Statements on Standards for Tax Services and the IRS's Circular 230 allow tax preparers to rely on information furnished by clients, there is still a presumption of due diligence, as well as common sense. Tax professionals don't want to find themselves unwitting parties to the commission of tax fraud, especially given the incredible growth in the identity theft “industry.” Tax preparers may even face professional liability in connection with identity theft (Sandra S. Benson, “Aiding and Abetting Fraud by Filing False Tax Returns,” The CPA Journal, April 2014, pp. 50–55).