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What Can CPAs do about Tax Identity Theft?

identity theftI am constantly getting emails and calls from members who have stories about how one of their clients has become a victim of tax identity theft and the person’s refund has been put “on hold” until the government can sort things out. Some of these stories can be heart wrenching. 

It’s no surprise that these stories are on the rise. Tax identity theft has mushroomed – the IRS identified 1.2 million incidents in 2011, over double the amount from 2010 (440,581) and the numbers may actually be much higher according to a Treasury Inspector General analysis. So, unfortunately, the odds that your clients may be affected have gone up considerably.

Victims may be alerted to theft when they learn that their information has been used to file a false tax return to obtain a refund, or when the thief tries to use the taxpayer’s identity to obtain a job. Once these kinds of events occur, the client’s problems are just beginning. A taxpayer trying to repair the damage is lucky if he or she is represented by a CPA; a taxpayer who tries to go it alone might be facing what may seem like a nearly hopeless, exhaustive boxing bout with the government.

What can you do to help your clients?  First, inform  your clients what to do if they receive an email or other communication that looks strange or odd. As a trusted tax professional, remind your clients that: (1) the IRS never uses email or social media to contact taxpayers directly; and (2) the IRS provides numerous telephone numbers and other ways for taxpayers to identify possible ID theft and report it.

Next, become familiar with the information on the IRS' website - it offers great advice about how to handle taxpayer identity theft and how to get tax records straight with the IRS. Then consider what you can do to streamline your firm’s office procedures to prevent theft from occurring. Our members highlight the need for a clean office - avoid leaving anything out in open view on a desk use shredders to eliminate obsolete paper. Practitioners also recommend that you:

  • Lock desk drawers and file cabinets (a basic but overlooked measure).
  • Prohibit the use of flash drives, which can easily be stolen.
  • Set up encryption procedures in your office, particularly when you are sending a client’s information to a third party, like a banker or attorney. 
  • Consider redacting Social Security numbers, employer identification numbers, and other personal information from client tax organizers.
  • Consider using couriers and certified mail (return receipt requested) to ensure that the right person receives letters and mail.
  • Educate staff about proper handling of client information and how to avoid Internet schemes.
  • Install and require the use of anti-virus and security software on all firm computers.

Potential tax identity theft victims can call the IRS at 800-908-4490 and complete Form 14039, Identity Theft Affidavit. You should also suggest that the client notify banks, credit card companies, credit bureaus, and local police, and verify that their Social Security earnings record will not be affected. If a client does become the victim of tax identity theft, it might take months to sort out problems with the IRS.

Here are some other resources you may find helpful:

  1. “Practical Advice for Practitioners Combating Taxpayer Identity Theft,” by William Hoffman, 135 Tax Notes 1453 (June 18, 2012).
  2. How to Advise Victims of Identity Theft, AICPA Webcast (archived)
  3. To “Report Phishing” incidents to the IRS
  4. “Taxpayer Guide to Identity Theft”

Benson Goldstein, J.D., Senior Technical Manager – Taxation, American Institute of CPAs. Benson serves as the AICPA's liaison before the IRS's four operating divisions regarding examination, collection, and other compliance matters; and as staff liaison on tax administration and compliance policy issues to the AICPA's IRS Practice and Procedures Committee.  He has a law degree from the State University of New York at Buffalo.


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