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Identity Theft And How To Assist Victims
By Theodore A. Sinars, JD and Claire L. McMahon, JD
November . December 2013 EA JOURNAL
Identity theft has become a bane of our society, not only destroying credit and financial lives through stolen credit card use, bank fraud, etc., but it also has entered into the realm of the IRS.
The reactive approach to preventing identity theft is lacking. It enables committed identity
thieves to plan around the systems, and in some instances, even use them to their own advantage.
For example, the IRS method of issuing refunds has made it easier for ID thieves to successfully file phony tax returns using the identity information purloined from innocent taxpayers. This is because the Service issued refunds before matching the correctness of W-2s, 1099s, and 1098s. Thus, ID thieves file tax returns early in the filing season using stolen names and Social Security numbers. Subsequently, when the true taxpayer files the correct tax return, the Service must deny the refund on the grounds that a return had been previously filed.
In this scenario, the IRS has identified the problem: that ID thieves use stolen taxpayer
identities to file bogus returns and profit from the refunds. To address this threat the IRS allows only one return per taxpayer ID number.
However, an ID thief can scam the system by filing earlier than the true tax- payer. A more
effective approach to stopping ID theft would be to make it unprofitable
for ID thieves. The IRS can be proactive and remove this incentive to steal IDs in the first place
by ensuring that a refund is not issued to a taxpayer who files a return using false
W-2s, 1099s, or 1098s by using the match- ing program before the refund checks are issued. In that way a refund check would not be issued until the IRS verifies the validity of the return. We have been advised that the IRS intends to reverse its course of early refunds until matching of IRS information can take place.
New Technology to the Rescue
New IRS technology has made a dramatic step toward streamlining the IRS and increasing efficiency with e-filing, electronic refund checks, and many more new programs. How- ever, this new technology comes with new threats from ID thieves.
In the past, the public was warned against throwing away a bank statement without shredding it and being careful to guard their belongings on public transportation. Today, ID thieves have evolved beyond those petty methods in favor of methods with greater, more profitable results. Most identity thieves are more sophisticated than the man searching through your garbage can.
Many thieves use technology to perpetrate the crime because technology allows an ID thief to exert little effort and take home much larger rewards. A simple website can net hun- dreds of unknowing taxpayer identities.
The IRS is trying to make the public aware of phishing in the hope that public awareness will
eliminate this threat. Phishing is the act of attempting to acquire taxpayer informa-
tion, such as user names, passwords, SSNs, and credit card details through deception in any kind of electronic communication. Identity thieves use these electronic forums to collect information because they are able to target a larger population and obtain more useful information with less effort. Oftentimes, it can be as easy as setting up a Web page and waiting for unsuspecting users to fill in their informa- tion.
That is why communications purporting to be from popular social websites, action sites, online
payment processors, or IT administra- tors are commonly used to lure the public.
Phishers write fake e-mails, make fake websites, send fake messages, and make pop-up ads on
legitimate sites, among other things. Oftentimes, phishers will take advantage of public Wi-Fi hot spots like a library or an airport.
However, their methods are always changing and evolving. The IRS approach to prevent phishing is to increase awareness and to report incidents. Fol- lowing is a sample communication from the IRS:
If you receive an unsolicited e-mail that appears to be from either the IRS or an organization
closely linked to the IRS, such as electronic federal tax payment system (EFTPS), report it by
sending it to firstname.lastname@example.org.
The Opportunities Are Endless Despite increased prosecutions, lengthy sentences, and awareness notices by the Federal Trade Commission (FTC) and the
IRS, identity thieves are more prevalent than ever.
This is because so many more sources of your identity are being defined each day.
For example, consider the following:
• Medical care, insurance companies, Medicare, hospitals, and doctor’s offices requiring taxpayer SSNs for insurance and credit purposes. Paper filing an IRS return. When paper filing, a taxpayer relies on human inter- vention to file a tax return. There have been instances where an IRS employee stole the paper returns and filed electronic returns claiming the refunds, or an intermediary could take the physical return and electronically file returns using most of the taxpayer information.
• Stealing IDs from the disabled, welfare recipients, or the elderly, who may not ordi- narily file
tax returns. Many identity thieves prey on the vulnerable members of society. Not only does this
group of people typically not file returns, but they will be less likely to notice that their
identities have been stolen before serious damage has occurred.
• Active duty military personnel are granted automatic extensions while in combat. ID thieves can use their information to file returns and claim refunds that the military personnel may not detect until long after they arrive back to the United States.
• Dishonest preparers have been known to prepare two returns for an unsuspecting taxpayer. For example, by showing the taxpayer a copy of the return which is prepared correctly with that copy being given to the taxpayer, while at the same time having the taxpayer sign an “original” return which contains numerous phony claims which would generate a larger refund. When the refund is received by the tax preparer, it is deposited to the tax preparer’s account with a net check being sent to the taxpayer. The taxpayer believes the correct amount has been refunded per his copy of the return, while the excess refund is being pocketed by the preparer.
• The deceased.
What Can You Do to Prevent Identity Theft?
• Make sure all your computer systems are protected by sophisticated anti-fraud systems and secure passwords.
• Secure your clients’ information. Look at the privacy positions in your office, such as returns
left on reception desks when deliveries take place; leaving tax returns on desks overnight where cleaning crews and maintenance staff can easily make copies through cell phone cameras; having clients in your office while other client information is readily viewable.
• Shred any materials of a confidential nature.
IRS initiatives to advise taxpayers include:
• Leave your social security card at home.
• Do not carry other documents with your SSN on your person.
• Protect your financial information.
• Secure your personal information at home.
• Protect computers using firewalls and anti-spam and virus software.
• Do not give personal information on the phone, through the mail, or on the Internet unless you have initiated the contact or you are sure you know with whom you are dealing.
• Avoid being naïve or careless.
• The IRS does not initiate contact with taxpayers by e-mail or social media tools to request
personal or financial information. Ever!
• Identity thieves can access your personal information by many means, including stealing your
wallet or purse, posing as someone who needs information about you through a phone call or e-mail such as an IRS agent or a bank representative; looking through your trash for personal information; accessing information through an unsecured website.
The IRS website provides some very good suggestions for taxpayers on how to choose a preparer:
• Check the preparer’s qualifications and whether they have a PTIN.
• Check the preparer’s history at the Better Business Bureau and verify any disciplinary actions.
• Find out about their service fees and avoid any preparers who want a percent- age of the refund or those who have the refund sent to their business.
• Ask if the preparer offers electronic filing.
• Make sure the tax preparer is accessible.
• Provide all records and receipts needed to prepare the return. Taxpayers should not use a
preparer who is willing to elec- tronically file a return before they receive their Form W-2 by
using their last pay stub. This is against IRS e-file rules.
• Never sign a blank return.
• Review the entire original return before signing it.
• Make sure the preparer signs the form and uses his or her PTIN on the return.
Steps to Assist Victims of Identity Theft
If your client has been the victim of identity theft, consider encouraging your client to fill out Form 14039 (Identity Theft Affidavit).
You should consider this an option for your clients who either know they have been the victim of identity theft or those who suspect they have been a victim due to the recent receipt of notices
alerting the taxpayer of suspicious circumstances. For example, notices alerting the taxpayer that the IRS has received W-2s or 1099s from employers with whom they are unfamiliar, notices of multiple returns filed for the same tax year, collection notices or other notices from years they
have not yet filed a tax return, or anything else that seems out of place.
Form 14039 should be filed for anyone who was a victim of identity theft and has
acknowledged it has currently affected his or her personal tax records, or by any person who has experienced an event involving the loss of per- sonal information which could affect their cur- rent or future federal tax filings. Form 14039 is readily available at irs.gov. Be careful to
forward the form to the appropriate IRS address.
The form can be filed in response to an IRS notice, or if an IRS notice has not been received, forwarded directly to the IRS at P.O. Box 9039, Andover,
MA 01810-0939, or faxed to 855-807-5720.
If you follow the appropriate channels,
the taxpayer will receive an IRS letter 4869-CS assigning them an IP PIN (identity protection for personal identification number). You will need to use the IP PIN to prepare returns going forward.
Although this will help ensure the taxpayer’s information is properly handled with the IRS and related tax matters, your assistance in advising your client should not stop there. Identity theft does not stop once the IRS is alerted to its occurrence. You should also encourage clients to file
a police report and retain a copy for the IRS and other institutions to verify their identity.
Additionally, you should urge your clients to respond immediately to any IRS correspondence
that they receive—as long as you can verify it is official IRS correspondence. For example, the
IRS will never, under any circumstances, contact your client through e-mail. Remind your clients
about this and other Internet safety precautions like secure websites, updating their security
software, strong passwords, and safe disposal of outdated equipment.
Additionally, a discussion on the safe usage of social media websites may be in order. As social media sites grow in popularity and expand to new frontiers, it is important to remind taxpayers to use them safely. Taxpayers should set privacy settings so that their information and their posts are only viewable by those they trust, and they should accept friend requests only from those they know and trust. A good tip is to also use a different e-mail address for professional networking sites than for personal sites. My personal suggestion is do not post that you and your family are on vacation, and avoid posting birthdays or birth dates,
personal e-mail addresses, home addresses, current employer, high school, etc., in order to
decrease the likelihood that an identity thief will piece together your identity.
The FTC has teamed with the IRS in the initiative to prevent identity theft. Following are FTC
recommendations to assist you and your clients if they have been victims of identity theft.
Set a Fraud Alert Have your client call a credit reporting company to report that he or she has been the victim of identity theft, and have them request that the company put a fraud alert on their credit file.
The numbers to call are: Equifax: 800-525-6285, Experian: 888-397-3742, TransUnion: 800-680-7289. Your clients should confirm that the credit reporting company will alert the other two credit reporting companies of their situation. Fraud alerts expire in ninety days, so make sure clients mark their calendar to renew it when the time comes. Clients should keep a record of phone calls and make copies of any letters they send.
Order Credit Reports
After your client places an initial fraud alert, they are entitled to a free credit report from each of the three credit reporting companies. They can obtain these reports by calling each company, explaining that they’ve placed an initial fraud alert, and are requesting a free copy of their credit report. Clients should ensure that each company shows only the last four digits of their SSN on the report. If they know which of their accounts has been tampered with, clients should contact the related business. Have them talk to someone in the fraud prevention department and follow up in writing. Letters should be sent by certified mail and a return receipt requested. They should keep a copy of any letters and pertinent details from phone calls.
Create an Identity Theft Report
An identity theft report will help clients deal with credit reporting companies, debt collectors,
and businesses that gave the identity thief credit or opened new accounts in their name.
The report will help them remove fraudulent information from their credit report, stop a
company from collecting fraudulent debts, place an extended fraud alert on their credit report,
and get information from companies about accounts the identity thief opened or misused.
They can access the proper form by Googling “FTC Identity Theft Report” or by phone at 877-
438-4338. Once they have completed the report, they can submit it to the FTC. If they call, make
sure they get their complaint reference number and affidavits password.
File a Police Report
Affected clients should simply bring their report, proof of the theft, a government-issued photo
ID, proof of their address, and the FTC’s memo to law enforcement (accessible by Googling “FTC Memo to Law Enforcement”) to their local police department. In the event that the police will not take a report about the identity theft, they should ask if they can file a miscellaneous incidents report, or they should go to a different police station, or the sheriff’s department, state police, or federal authority. Make sure they do not leave without a copy of the report or a report number in hand. It is important that they update their files, record the dates they made the calls or visits, record the police report number, and keep it all in their records. Their FTC identity theft affi davit and their police report make an identity theft report. If they need to update their complaint at any time, they can call the FTC at 877-438-4338.
Identity theft has become a pervasive problem posing financial and tax-filing risks to law-abiding citizens. If you become aware of identity theft schemes, report them to both federal and state authorities. If you or your clients become victims, file the appropriate reports with both the FTC and the IRS. EA
About the Authors:
Theodore A. Sinars, JD, is a partner in the Chicago tax law firm of Madden, Jiganti, Moore & Sinars. For over forty-fi veyears he has concentrated in the areas of IRS civil and criminal
taxation, procedure and litigation, including civil audits, Appeals,Tax Court, criminal tax investigations, IRS and Department of Justice Tax Division review, United States Attorney’s
Offi ce, federal district court and appellate matters.
Claire L. McMahon, JD, is an associate at the Chicago tax law firm Madden, Jiganti, Moore & Sinars. She concentrates her practice in the areas of IRS and state civil and criminal taxation, procedure and litigation, including civil audits, appeals, and criminal tax investigations.
Before joining the fi rm she coordinated the tax clinic at the John Marshall Law School.