What to Do if a Client is a Tax-Related Identity Theft Victimby
The Federal Trade Commission estimates that as many as 9 million Americans have their identities stolen each year. Of these cases, tax-related identity theft has topped the list as the most common form of reported identity theft for the past five years. As tax practitioners, it's crucial to understand how this type of theft can be identified and what to do on behalf of your client.
In general, tax-related identity theft occurs when an individual intentionally uses the personal identifying information of another person to file a false tax return with the intention of obtaining an unauthorized refund. This type of identity theft can be identified in the following two ways.
1.IRS initiated. The IRS applies identity theft filters to all filed tax returns at processing. The upside to this screening process is that the IRS was able to detect and stop approximately 3.8 million suspicious tax returns during the 2015 filing season. If the filters indicate potential identity theft, the IRS will halt the processing of the return and mail the taxpayer a letter (Letter 4464C, 5071C, or Notice CP01B) alerting them of the return filing and requesting that they verify their identity and the filing or nonfiling of the tax return.
The downside to the screening process is that many taxpayers' returns are incorrectly suspended. With a false-positive rate of 34 percent, approximately one out of three returns suspended last year were legitimate returns. This can lead to frustration that is further amplified by the difficulty of reaching a live representative when calling the phone number individuals are instructed to dial.
What to do on behalf of your client. If your client receives a letter from the IRS alerting them of a return filed on their behalf and requesting them to verify their identity, advise the client to either verify their identity through the Identity Verification Service (IDVerify) website or by calling the IRS at the Taxpayer Protection Program (TPP) line at (800) 830-5084. The TPP line is designed to assist taxpayers whose returns have been suspended by the IRS because of potential identity theft; however, due to the significant decline in the level of service on this line (81 percent in 2014 and 17 percent in 2015), taxpayers are highly encouraged to go through the IDVerify website. According to the IRS, the IDVerify website is the fastest way to verify identity unless the taxpayer is unable to access the website or did not file the return in question.
Your client has 30 days to respond to the letter or notice from the IRS. The IDVerify website will ask a series of âout of the walletâ questions that only the real taxpayer is likely to know. The client should have their prior-year tax return and current-year tax return available, if filed, as well as supporting documents, such as forms W-2 and 1099 and schedules A and C. Once the client's identity is verified, they can confirm whether or not they filed the return in question.
If your client did not file the return, the IRS will treat the case like an identity theft case and follow the appropriate procedures to assist them. If your client confirms that they did file the return, the return will be processed and the refund issued in approximately six weeks.
Typical response times. If your client contacts the IRS and confirms that an identity theft has occurred, it can take 278 days on average to resolve the case and have the refund released. However, if the client contacts the IRS and confirms that no identity theft has occurred, the IRS will process the return and issue the refund in approximately six weeks.
The average wait time on the TPP line in an identity theft situation initiated by the IRS is 27.7 minutes. It is worth noting that for the 2015 filing season, out of the 2.8 million dialed attempts into this line, IRS representatives answered less than 500,000 of these calls. Again, the fastest way to verify identity in an IRS-initiated identity theft situation is the IDVerify website.
2.Taxpayer initiated. If your client or their spouse attempted to file a tax return and it was rejected because a return was already filed in their name, or your client received notice that personal information was compromised due to a data breach, or their personal information was lost or stolen, your client must report the identity theft to the IRS.
What to do on behalf of your client. Direct your client to contact the Identity Protection Specialized Unit (IPSU) at (800) 908-4490 to report the identity theft. The IPSU assistors provide services for victims of tax-related identity theft, normally after the theft has taken place. Your client will also need to complete Form 14039, Identity Theft Affidavit, and send it to the IRS.
Note: The best way to submit information to the IRS is via fax. The IRS fax numbers are e-fax, which means that the documents come in PDF form to an email inbox that an individual is specifically responsible for. There is a strict time commitment to respond, whether it is to say they received it or if they are working on the information.
Typical response times. Once your client has reported the identity theft to the IRS and sent in Form 14039, it can take 278 days on average to resolve the case and issue the refund. The average wait time on the IPSU line in an identity theft situation initiated by the taxpayer is 25.4 minutes.
When to Use the National Taxpayer Advocate Office
If your client has reported identity theft to the IRS through one of the channels above and is experiencing hardship due to the delayed refund or the identity theft issue, or if they haven't heard from the IRS in a 30-day timeframe, they should contact the National Taxpayer Advocate (NTA) office at (877) 777-4778. In extreme cases, they can contact or visit their local Taxpayer Advocate Office.
For 2015, the NTA took 66 days on average to resolve identity theft cases and issue refunds to taxpayers. The average wait time on the NTA line is 18.8 minutes.
While there are steps that the IRS is taking to combat tax-related identity theft, there is no doubt these types of crimes will continue. As a tax practitioner, you play a valuable role in helping your client regain their identity.
Statistics in this article were pulled from the National Taxpayer Advocate Objectives Report to Congress for Fiscal Year 2016 and the Treasury Inspector General for Tax Administration Office of Audit Report, Victims of Identity Theft Continue to Experience Delays and Errors in Receiving Refunds.