Identity Theft

Identity thieves stole an estimated $5.2 billion from the IRS this past year per a recent Government Accountability Office (GAO) report.  Through just the first six months of 2013, the Treasury Inspector General for Tax Administration (TIGTA) identified approximately 1.63 million taxpayers that were affected by identity theft, which is many multiples of the 270,000 taxpayers affected in all of 2010.

*Through June 29, 2013. Source: Treasury Inspector General for Tax Administration Final Audit Report 2013-40-129

While already substantial, the threat of identity theft and refund fraud is increasing by almost every metric. J. Russell George, the Treasury Department’s Inspector General for tax policy, recently estimated that the IRS could pay $21 billion in fraudulent refunds over the next five years. Refund fraud has become so widespread that a police chief claimed to IRS Commissioner John Koskinen that “street crime is down because everybody is now filing false tax returns.” This was never more apparent than when, in 2010, the drop in local drug dealing was so precipitous that it alerted local Tampa Bay law enforcement to numerous instances of tax fraud in the area.

Identity thieves begin their fraud by stealing an individual’s Social Security or Individual Taxpayer Identification number and other personal information. Generally, they then use one of two methods to complete the identity theft. The first method involves filing for a refund early in the year with the stolen taxpayer’s information, reporting fabricated income, deductions, credits, and withholding amounts. The second, and rarer, form of identity theft fraud occurs with the thief gaining employment using stolen personal information and underwithholding taxes against those wages. The taxpayers in both instances often do not realize they have been the victim of identity theft until they try to file their own tax returns.

Many believe the issue is currently so prevalent because of the perception that IRS refunds are “easy money,” according to Kathryn Keneally, U.S. Assistant Attorney General for the tax division. For these criminals, it is a numbers game, which explains the increasing volume of taxpayers affected and fraudulent returns filed over the past few years.

What to Expect If You Are the Victim of Identity Theft:

1. If you receive a notice, forward the notice to your Marcum team or respond immediately.
2. In most cases, a Form 2848 (Power of Attorney) will be filed with the local IRS Service Center.
3. The Social Security Administration, Federal Trade Commission, and the three major credit reporting agencies should be notified of the identity theft.
4. An executed Form 14039, Identity Theft Affidavit, will be filed along with a copy of your proof of identity (such as a license or passport).
5. You will most likely be unable to file your tax returns electronically for the current year.
6. You may be assigned an IP PIN by the IRS to confirm your identity when filing your current tax returns for as long as your account remains at risk.
7. A monthly follow up with the IRS Identity Protection Specialized Unit may be necessary after your paper return is filed and until the return is processed.
8. If you’re owed a refund, you will receive it. However, resolution of this process will usually take several months and in rare cases it has taken over a year before an identity theft victim received their refund.

Government officials inside the IRS, however, are quick to point out that the tide is turning and that the IRS has made significant strides in combatting fraudulent tax refunds. During the 2013 filing season, the IRS believes it prevented approximately $24.2 billion in fraudulent identity theft refunds. In addition, the IRS recently announced that it would be assigning 3,000 people to monitor identity theft as well as the unveiling, and implementation, of the new Return Review Program in early 2015. The program will be aimed specifically at preventing abuse of the Earned Income Credit, a common practice by identity thieves.

Government officials inside the IRS, however, are quick to point out that the tide is turning and that the IRS has made significant strides in combatting fraudulent tax refunds. During the 2013 filing season, the IRS believes it prevented approximately $24.2 billion in fraudulent identity theft refunds. In addition, the IRS recently announced that it would be assigning 3,000 people to monitor identity theft as well as the unveiling, and implementation, of the new Return Review Program in early 2015. The program will be aimed specifically at preventing abuse of the Earned Income Credit, a common practice by identity thieves.

Current Proposals to Thwart Fraudulent Identity Theft Refunds:

• The GAO has recommended a lowering of the annual threshold for e-filing W-2s.
• The Treasury has recommended an acceleration of the W-2 deadlines to January 31st.
• A TIGTA audit recommended freezing future tax refunds when fraud is discovered until identity of the taxpayer is verified.

Recent attention paid to this issue and the stepped up detection measures by the IRS have helped. In 2011, TIGTA reported that the volume of undetected fraudulent refunds decreased by $1.6 billion from $5.2 billion reported in 2010. While there has been some progress in detecting fraudulent tax refunds, the threat is still present, with billions continuing to be paid out. As detection efforts are improved by the IRS, identity thieves are likely to become more brazen. Taxpayers should review their security measures and familiarize themselves with any further steps they can take to minimize their exposure to identity theft. Marcum can assist in dealing with identity theft, the subsequent compliance and necessary correspondence with taxing authorities.

What You Can Do to Minimize Your Exposure:

• Provide your tax information to your tax accountants early on so that your return can be filed as soon as possible. If a thief then tries to file a return with your information, that return will be rejected and they will be unable to substantiate that identity when the IRS sends them a notice.
• Inform your accountant if you have ever been the victim of identity theft.
• Don’t carry your Social Security card or any document(s) with your SSN on it.
• Don’t reveal your SSN to a business just because they ask. Give it only when required.
• Protect your financial information.
• Check your credit report every 12 months.
• Secure personal information in your home.
• Protect your personal computers by using firewalls, anti-spam/virus software; update security patches; and change passwords for Internet accounts.
• Don’t give personal information over the phone, through the mail or on the Internet unless you have initiated the contact or you are sure you know who you are dealing with.
• Be aware that the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.
• If you receive a suspicious e-mail requesting personal information and claiming to be from the IRS, please forward the e-mail to [email protected]. Go to IRS.gov (keyword “phishing”) to get instructions on how to forward the e-mail.
• If you suffered a lost or stolen wallet, questionable credit card activity or credit report, and believe you may be at risk, contact the IRS Identity Protection Specialized Unit. (You will be asked to provide a police report or file a Form 14039 Identity Theft Affidavit).