Tax Identity Theft & What To Do About ItSubmitted by Affiance Financial on November 2nd, 2016
by Steven E. Warren
Affiance Financial is pleased to share the following article on Tax Identity Theft by Steven E. Warren. Steven E. Warren, CPA, MBT practices accounting and consulting at Schechter Dokken Kanter, a Minneapolis CPA and consulting firm, and he is an adjunct professor at the University of St. Thomas. Mr. Warren can be contacted at firstname.lastname@example.org or 612-332-9391.
It happened about two years ago, at a time when my then 15-year-old daughter Haley and I hadn’t had “the talk” yet. I’m not sure why I put it off for so long. When I got home from work, Haley forced the conversation. “Dad, we got a call today from a guy claiming to be from the IRS.” I asked her to tell me more. “I hung up on him. I knew it was fake.” With a warm proud feeling I asked Haley how she knew. “I don’t know. I just knew.”
A 63-year-old client was not as phone savvy as Haley. Brenda (not her real name) called me frantically needing help. “A man from the IRS called about our 2011 tax return. He said I’m going to jail!” After assuring Brenda she won’t be going to jail (at least not because of her 2011 tax return), Brenda’s blood started flowing again and she could now move on with her day.
Even more common than a call is the unexpected email supposedly from the IRS. Apparently, this is more believable than an email from a Nigerian prince in need of your help depositing his money.
Thieves are increasingly known to file false tax returns in taxpayers’ names to claim fraudulent refunds. Although they make up a relatively small number of the known perpetrators, some tax preparers have been caught securing fraudulent refunds for their clients in exchange for a fee based on the size of the refund. Other tax preparers have been caught altering tax return information to create refunds at least partially directed to their own accounts without their clients’ knowledge.
Another form of tax identity theft occurs when you are issued a Form W-2 from a business that does not employ you. It could result from either an undocumented worker or a person trying to hide a criminal past who’s using your social security number to gain employment they otherwise could not obtain.
Tax identity theft is a serious problem that we should proactively address to reduce our chances of becoming a victim. In addition to the emotional, time, and financial losses you may individually suffer, our government and we as a nation are paying a sizable price for tax identity theft.
When Contact Happens
If you get a call or an email from someone claiming to be from the IRS or state department of revenue when it is not a return of your call or a reply to an email you sent, the call or email is likely fraudulent. When you suspect a call may be fraudulent, end the call as soon as you can. When you suspect an email may be fraudulent, do not click on any links within it.
Sophisticated thieves can manipulate caller ID displays and graphics in emails to appear as though the communication came from a taxing authority. Some are challenging to spot and you need to be concerned about a caller or sender trying to learn your social security number or other information to steal from you.
As a matter of policy, the IRS does not initiate contact by phone call, text message, email, or social media and the same can be said of most state departments of revenue. First contact from taxing authorities is normally a letter sent using the U.S. Postal Service. If you think a received call might be legitimate, request and note the person’s contact information including office location. All IRS employees have identification numbers. They often tell it to you on their own and should always share it when asked.
Inform your CPA about the contact as soon as possible. You may wish to try to independently confirm whether the phone number is legitimate. A Google search of the number is a good start. If you can’t confirm the number’s legitimacy and want to tackle this on your own, calling the agency’s main number ((800) 829-1040 for IRS) to inquire about the call may be your best next step. Your CPA can advise you on other appropriate actions that are prudent for your situation.
What We Are Doing (and Your Tax Preparer Should Too)
E-filing your tax returns is the most secure way to transmit your information to the taxing authorities. Consequently, my CPA firm urges our clients to have us e-file all client tax returns when the option is available. E-filing does not use e-mail but instead uses a direct link to a secure web site.
A paper copy of your tax returns that we provide you for your records will only display the last four digits of all listed social security numbers. Any unneeded paper copies of your tax returns or other documents with social security numbers, bank account numbers or credit card numbers (and certain other sensitive information) will be returned to you or shredded.
We will send electronic tax return copies using our firm’s portal. A portal is a secure website that you access using a password you select.
What the IRS and States Are Doing
A client received LTR 5071C; supposedly from the IRS. It states that the IRS needs to verify information on their income tax return. It lists a web address and phone number to contact to provide “the IRS” with personal information. The letter appears legitimate because it precisely uses the IRS’ letter format with no spelling errors. But it also looks suspicious because the letter is seeking sensitive information to verify a return our client had yet to file.
It turns out our client’s letter is legitimate. The IRS properly flagged a fraudulent tax return and confirmed its illegitimacy with our client before issuing a refund to a thief. Even this tax expert needed to do some sniffing before confirming the letter was real when seeing it for the first time. Credit the IRS for this victory.
The IRS issues “identity protection personal identification numbers” (IPINs) annually to people affected by tax identity theft. The IPINs are to be submitted with tax returns as a way to confirm the return came from the taxpayer. If the IRS receives a return from someone who was issued an IPIN for that tax year, they will only process the return if the IPIN is included.
The IRS and states conduct a computerized comparison or matching of what is on your tax returns to their copies of your Form 1099s, Form W-2s, and other documents transmitted to them by the issuing party. Large refunds are commonly being delayed with extra care given to confirm the legitimacy and accuracy of the refund amount before it is paid.
The IRS tested a W-2 verification program earlier this year, requiring some taxpayers to enter in their tax return a 16-digit code that appears on certain payroll firm prepared Form W-2s. The program was considered successful for 2015 tax returns with about 24 million W-2s containing the number. The program has been expanded and is scheduled to include about 50 million W-2s for the 2016 tax year.
Beginning in 2017, tax returns that include either or both the earned income tax credit and the additional child tax credit will not be paid before February 15, 2017, no matter how early the tax return was filed. These credits have been identified as two of the most exploited by fraudsters and the additional time will allow more opportunity to verify tax return information before paying refunds.
"Taxpayer social security numbers, dates of birth, and street addresses were accessed..."
The IRS re-launched its online transcript retrieval service in June of this year. It had been shut down since May of 2015 after it was discovered the site had been successfully hacked by unauthorized parties. Taxpayer social security numbers, dates of birth, and street addresses were accessed by the hackers. Today’s version of the online transcript service uses a two factor identification system. A six-digit number sent to your cell phone must be entered on the site to gain access to your transcript. An email account and the account number for certain credit card and/or loan accounts are also needed.
Some states began requesting your driver’s license number with your state income tax return. When the driver’s license number is not provided or does not match the number on record, extra scrutiny is often given to the return before a refund is issued.
Taxing authorities have made great strides combating identity theft but still have a long way to go. Many of the IRS’ systems and procedures are outdated. Past pressure to give refunds quickly has eased some to allow more tax return verifications. Many argue that IRS budget cuts of recent years have substantially hampered efforts to combat tax identity theft and other forms of tax fraud.
It has always been a good idea for you to inform your CPA about any contact you receive from a taxing authority right away. Doing so is more important than ever today with the increasing number of tax scam attempts in circulation.