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If You or Your Clients are the Victim of Tax-Related Identity Theft

ID-fraudTax-related identity theft is a multi-billion dollar business that may be affecting you and your clients. Identity theft is the fastest growing crime in the world. It can affect your credit and tax records and your earnings record—a criminal record may even be established in your name. No one is immune.

Identity theft that affects your credit record has been around for decades; however in the past 10 years, tax-related identity theft has seen an explosive rise. The statistics are staggering. A report from the Treasury Inspector General for Tax Administration indicated that during the 2011 filing season, 1.5 million fraudulent returns went undetected and refunds totaling $5.2 billion were issued to the wrong person. 

But that’s not all. It takes the IRS an average of about 6 months to resolve an identity theft issue. This means victims should not expect a quick refund. The IRS is working diligently to speed up this process by implementing screening filters that prevent false returns from being processed.  These filters use clustering techniques to target multiple refunds, particularly those refunds that are scheduled to be deposited into a single account or mailed to a single address.

The IRS has also issued identity theft PINs to those taxpayers who have been identified as victims. Anyone who completes and files an Identity Theft Affidavit (Form 14039) with the IRS will receive an Identity Theft Protection PIN once their identity has been verified. Returns filed with the IP PIN will be processed as a legitimate return with no delays. The IP PIN will be issued only once per year so make sure you keep it in a safe place. The IRS has already issued IP PINs to more than 770,000 taxpayers this year who have been victimized by identity theft, more than twice as many as last year.

So how do identity thieves collect your tax information? They take advantage of a variety of sources:

  • Dumpster diving
  • Online fraud: website spoofing, smishing, malicious emails, popup screens, hacking, malware
  • Inside sources that have access to employment or medical records
  • Stealing mail, wallets, purses, laptops and other electronic devices
  • Direct personal contact with trusting individuals
  • Social Security Death Index

Unfortunately, the list above is not all-inclusive. Identity thieves are constantly looking for the newest source of information or the newest form of technology to commit their crime. So how can you protect yourself?

You can start by asking yourself a few important questions. Is the personal information you are providing to an outside source necessary to complete a transaction? Do they have a business requirement that makes this information necessary? Or can they live without it?

If you are a victim of identity theft there are several specific steps you should take:

  1. Report to a credit agency as soon as possible. Report your identity theft to the fraud department of one credit reporting agency. They must notify the other two companies: Equifax, Experian, TransUnion
  2. Report to the Federal Trade Commission to establish an Identity Theft Affidavit
  3. File a police report with your local police or sheriff's department right away
  4. Notify the U.S. Postal Service (for fraud involving U.S. mail) 800.275.8777
  5. Notify the IRS if your SSN can or has been used fraudulently for tax purposes. File an IRS Identity Theft Affidavit (Form 14039)

Daniel Moore, CPA, Founder, D.T. Moore and Company, LLC Daniel's practice concentrates on tax planning and compliance for small business and individuals. He was appointed in 2010 to serve as a member of the AICPA Individual Income Tax Technical Resource Panel and also serves on the planning committee for the Tax Strategies for High Income Individuals conference. Daniel serves on the legislative and public relations committee of the Ohio Society of CPAS.


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