Understanding Tax Return Identity Theft
The tax return has been completed and reviewed. Upon submitting the return to the government, a message appears reflecting that a tax return with the name and social security number entered has already been filed with the U.S. government. Unfortunately, this is quickly becoming a more common situation.
So, what exactly is tax identity theft and how can you tell if your client has fallen prey to it?
Tax return identity theft occurs when an individual utilizes a taxpayer’s name and social security number to file a fraudulent tax return and obtain a refund. Taxpayers may be made aware of tax return identity theft upon attempting to file their own return or may be alerted when the IRS issues a notice to the taxpayer that it suspects that tax return identity theft has occurred. In either scenario, the suggestion is the same. Your best course of action is to immediately alert the three main credit bureaus — Equifax, Experian and TransUnion — that you suspect your client has been the victim of tax identify theft, and obtain a credit report from one of these three bureaus so that you can confirm and monitor any fraudulent behavior.
Notify the IRS
If you receive notification of identity tax fraud when you are attempting to file your client’s tax return, you should also inform your client of the issue. Your client can either call the IRS or, with Power of Attorney Form 2848, you can contact the IRS on their behalf.
When notifying the IRS, you should explain that you received the already submitted tax return message. You should also complete and submit an Identity Theft Affidavit (IRS Form 14039). A PIN will be issued to your client. Once your client receives the PIN, he or she must call the IRS to confirm receipt of the PIN which verifies to the IRS that he or she is the true owner of that identity. One word of caution: Obtaining a replacement PIN requires much leg work so it is imperative that you communicate to the client the importance of not misplacing the PIN.
Notify the FTC
After calling the IRS to inform it of the possible theft, it is recommended that you file a formal complaint with the Federal Trade Commission (FTC) via a phone call or by utilizing the website identitytheft.gov. The site also offers valuable resources such as sample letters you can use to communicate to your client’s credit card companies to dispute charges, the three credit bureaus and their financial institutions.
Notify the Credit Bureaus
One of the most helpful pieces of advice you can offer a client in this situation is for them to contact one of the credit monitoring organizations. They are accessible online: equifax.com, experian.com, and transunion.com. These sites provide step-by-step guidance for completing the credit alert application. The credit alert is normally valid for 90 days. In alerting one credit bureau of the identity theft, the other two will also be notified. When you have contacted one of the three credit monitoring agencies, your client will gain access to any financial accounts opened with their “authorization.” Your client will want to carefully review that activity and close any accounts which they have not authorized.
Financial institutions must also be contacted to be made aware of the fraudulence. Victims should notify banks that their identity has been compromised. Upon notification, most taxpayers are given a password that is required for each bank transaction to verify the taxpayer’s identity.
If you provide your client with family office services, you may contact the financial institutions on behalf of the taxpayer. These institutions may require a police report. The report verifies that the taxpayer was, in fact, a victim of identity theft. The report should list all accounts with suspected fraudulent activity.
Although the thief who filed the fraudulent tax return may only have had the stolen name and social security number of his or her victim and no actual financial information, in some cases the name and social security number of your client may be all that is required for a would-be fraudster to steal funds. It is not uncommon for fraudulent tax returns to show requests for substantial dollar amounts that are not necessarily in the victim’s financial realm. For clients who find themselves in a financial transaction after experiencing identity theft, what once was considered run-of-the-mill can now be quite frustrating. Mortgage refinancing, for example, becomes a process of additional steps. During a mortgage refinance, the taxpayer’s finance records are required. A client may be required to provide a copy of the police report concerning his tax return identity theft.
In many instances, it will take up to a year to have the tax return in question processed. For those taxpayers receiving a refund, it may take a few attempts on the accountant’s part to follow up with the IRS. For those whose overpayment was to be applied to the following year, it is more common than not that the overpayment will not be applied, but rather refunded upon the close of the matter. Should this occur, it is recommended that the refund check be marked void and returned to the IRS. The overpayment being refunded versus applied to the following tax year can cause your client to receive an IRS interest and penalty notice since the IRS’ records may reflect a tax underpayment. The IRS has notified that this type of matter cannot be resolved via telephone calls, but rather in writing only.
Whether your clients find themselves victims of tax return identity theft or not, it is a good idea to suggest proactive best practices to them. Remind them to enroll in credit monitoring and/or identity theft protection programs. Checking their credit report frequently can assist them in catching the issue early and remedying it quickly.
Raquel Arrechea, CPA, MST, is the executive director of the individual tax practice at Untracht Early. She specializes in tax services including high net wroth individual taxation, tax consulting, tax controversy and international tax. Raquel is a memberof the NJCPA Federal Taxation Interest Group and can be reached at firstname.lastname@example.org.
This article appeared in the January/February 2018 issue of New Jersey CPA magazine. Read the full issue.