There is no question that identity theft – particularly as it relates to taxes – is a major criminal activity and a serious threat. The Federal Trade Commission (FTC) notes that last year this segment of fraudulent crimes topped its list of consumer complaints for the 15th consecutive year.
The Internal Revenue Service has initiated a new joint effort with state governments and industry experts to address the growing threat, based on:
- Better authentication of taxpayers, including data points that can be shared with the IRS and states at the time of filing, beginning in 2016.
- Sharing of fraud leads for better identification of scammers.
- Information assessment.
- A uniform cyber-security framework.
- Enhanced taxpayer communication and awareness.
This last point may be especially critical, given the emergence of tax fraud built on imposters claiming to be employees of government agencies including the Internal Revenue Service.
“While identity theft remains a huge issue, consumers should also keep a close eye out for imposter scams,” said Jessica Rich, director of the Federal Trade Commission’s Bureau of Consumer Protection about their report on identity theft in the last year. “Whether it’s pretending to be the IRS during tax season, or making false promises of a lottery win, scammers are increasingly sophisticated in their efforts to deceive consumers, but the FTC will continue working to shut these scammers down.”
The problem is that federal and state agencies may be more concerned about the threat than consumers. A new study released by LexisNexis® Risk Solutions, part of RELX Group, on identity theft-related tax refund fraud in the states, found a substantial gap between the attitudes of consumers and those of state officials.
“This research is the first of its kind that looks at the problem of income tax refund identity fraud in the states from both the state government and taxpayer perspectives,” said Haywood Talcove, CEO, Government, LexisNexis. “The findings reveal a concerning disconnect: while identity-based tax refund fraud is a top priority for states with 86 percent of government respondents calling it a ‘major problem,’ only a third of taxpayers are ‘extremely concerned’ about it. The good news is that taxpayers surveyed said they are willing to do their part and support measures implemented by states to prevent the fraud altogether.”
In part, the issue is that relatively few taxpayers are personally impacted by identity theft. In spite of considerable media and official attention, the number of incidents of tax fraud based on identity theft are, according to the FTC report data, modest at best. The 149.5 million tax returns processed in 2014 generated only 160,000 complaints – only about one-tenth of one percent.
This suggests that more consumer education will be necessary as the problem continues to grow. This growth is likely - the Consumer Sentinel Network, a law enforcement coalition organized by the FTC, has listed identity theft as the fastest growing category of consumer crime in the US today.
The Internal Revenue Service has identified several signs that a consumer may be the victim of identity theft that include if more than one tax return was filed with the consumer’s SSN; if the consumer owes additional tax, refund offset of has had collection actions taken against them for a year in which they did not file a return; or if IRS records indicate the consumer has received wages from an unknown employer.
The IRS also suggests the following strategies to reduce the risk of tax fraud based on identity theft:
- Don’t routinely carry your Social Security card or any document with your SSN on it.
- Don’t give a business your SSN just because they ask – only when absolutely necessary.
- Protect your personal financial information at home and on your computer.
- Check your credit report annually.
- Check your Social Security Administration earnings statement annually.
- Protect your personal computers by using firewalls, anti-spam/virus software, update security patches and change passwords for Internet accounts.
- Don’t give personal information over the phone, through the mail or the Internet unless you have either initiated the contact or are sure you know who is asking.
While these strategies are helpful, tax professionals may want to take seven additional steps to protect themselves and their clients:
- Prominently display a statement indicating your firm will not participate even in small frauds such as hiding income or inflating deductions. Then enforce the statement, particularly among seasonal and new employees.
- Validate every claim, particularly those required to authenticate the taxpayer and dependents.
- Make copies of all authentication documents and retain them in the client file.
- Stock copies of IRS Publication 5027 and Form 14039, Identify Theft Affidavit, and make them available to clients who suspect they may have been victimized.
- File client returns early, of possible.
- Use paper shredders throughout the firm, and arrange for secure disposal of the shredded documents.
- Keep pace with news regarding new fraudulent scams, including the IRS annual “Dirty Dozen” listing.
Taxpayers are frequently focused on the requirement to file their taxes, or the anticipation of a refund, and may not sufficiently pay attention to the dangers of identity theft. It falls to the tax preparation professional, as the front line of the tax industry, to assist their clients in preparing and protecting against victimization by identity thieves and tax frauds.