Identity Theft and Taxes

Friday, October 17, 2014

Identity theft is a growing and frustrating problem in today’s world.

Perpetrators run the gamut from sophisticated thieves breaching the security of large retailers to people rummaging through garbage for useful information, to everything in between. We have been warned not to reveal personal information, and to shred documents containing Social Security numbers, account numbers or other sensitive information. [Source:]

The tax world has also been touched by identity theft. This has most commonly been manifest by unscrupulous individuals using stolen Social Security numbers and filing fraudulent tax returns claiming a refund. Typically the fraudulent tax return is filed early in the tax season before the true tax return gets file

The IRS and the states have programs in place if you have been, or suspect you are, the victim of identity theft. The most direct example of detecting a tax-related identity theft is if the IRS receives multiple tax returns using the same Social Security number. In that case the IRS will notify a taxpayer by mail and follow a protocol to ensure that he or she is the true individual associated with the Social Security number.

If any of your tax clients receives a notice from the IRS, they should respond immediately by calling the telephone number on the notice. Once they have been identified by the IRS as an identity theft victim and have provided the required information, the IRS will issue them an identity protection PIN, which will be mailed to them and included in the following year’s tax return to authorize electronic filing.

A taxpayer who knows or believes they may have been the victim of identity theft (whether generally or specifically with respect to tax matters), but has not received an IRS notice, should promptly call the IRS identity theft specialized unit at 800-908-4490.

The taxpayer should also complete Form 14039 and submit it to the IRS. These steps put the IRS on notice of potential problems, and will also prompt it to issue the identity protection PIN.

Note that IP PINs are only issued at one time during the year, typically in October or November.

Therefore if the IRS does not have sufficient time to process Form 14039 before PINs are issued for the year, the taxpayer will need to wait for the following year cycle before receiving a PIN.

The consequence of not having an IP PIN is that the tax return will need to be paper filed rather than filed electronically. If one of your clients has been issued a PIN, but you or they cannot locate it, they can retrieve it on the IRS Web site,, or call the identity theft unit’s telephone number noted earlier.

As a way to identify and combat identity theft, starting with the 2014 tax year the IRS will limit to three the number of direct deposit refunds per bank account. More than three will get flagged and may not be processed. Legitimate multiple deposits will most likely come into play with respect to a family unit, where refunds from parents and multiple minor children are directed to a single account. If that’s the situation of some of your clients, they should request that some or all refunds be issued by check rather than direct deposit.

While less common, businesses have also been victimized by identity theft. The most prevalent scenario has been the use of a business’s tax identification number in generating a fraudulent W-2, which in turn is used to obtain fraudulent refunds by individuals. All business owners should be aware of this possibility and should limit exposure of their tax identification number (also known as employer identification number, or EIN).

Be aware that the IRS will not telephone taxpayers or send them an email threatening dire consequences if they fail to pay an amount allegedly owing or fail to provide identification or banking information. IRS contact is always done by mail. Fraudsters have manipulated caller ID to make it appear that an incoming call is from the IRS. Do not be fooled by this!

Also, do not be fooled if someone calls and correctly gives you the last four digits of your Social Security number, either to trick you or your clients into believing they are who they say they are, or to supposedly confirm your identity. Documents such as W-2s, pay stubs, Form 1099 or financial documents are frequently issued with only the last four digits of the Social Security number showing.

Should such a document fall into the wrong hands, a fraudster can use it to create a pretext, gain trust and proceed to elicit confidential information, which an otherwise suspicious person may now give willingly. The same warning equally applies to the last four digits of a credit card.