Tax Identity Theft Schemes Accounting Professionals Should Be Aware of in 2020

While the IRS has made significant progress in combatting tax identity theft, resourceful identity thieves remain active and constantly introduce new schemes. Tax guru Julian Block tells you what to look out for in 2020.

Jul 2nd 2020
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A media-savvy IRS often announces that one of its top priorities is combatting criminals who steal tax-related information. While the IRS has made significant progress in combatting tax identity theft, resourceful identity thieves remain active and constantly introduce new schemes.

One of their consistently remunerative ploys: Use stolen Social Security numbers and other information to file fraudulent 1040 forms that claim hefty refunds—claims criminals generally submit at the start of the filing season.

In my experience, most taxpayers are unaware that they can avail themselves of a simple, perfectly legal way to thwart these thefts—file a 1040 that shows a balance due.

How are they able to do that? Let’s start with employees like Patty, who receives wages that are subject to withholding for income taxes. She could decrease withholding by revising her Form W-4, Employee’s Withholding Certificate.

Some reminders for Patty and other employees who select that route and need the W-4’s most recent version: Ask their accountants or go to irs.gov, where they also can check out the IRS’s Tax Withholding Estimator for help on how to complete a W-4.

Let’s pivot to self-employed individuals like freelance writer Maxene. Unlike Patty, who pays taxes through withholding, Maxene makes quarterly payments of estimated taxes. Maxene and other self-employed persons could decrease their estimated payments.

Finally, let’s consider retirees like LaVerne, who supplements her Social Security with a pension from her former job and money she removes from her IRA. Like freelancer Maxene, LaVerne could decrease her estimated payments.

Unlike Maxene, LaVerne and other retirees could even skip their estimated payments entirely, while also adjusting the withholding from their pensions, annuities, Social Security benefits and distributions from IRAs, 401(k)s and other tax-deferred retirement plans.

How badly can things turn out when Patty, Maxene and LaVerne don’t decrease withholding or estimated payments, and instead file returns that claim refunds? Taxpayers whose identities have been stolen may receive impersonal responses from the IRS.

The agency might word them like this: “We previously received a 1040 showing your name and Social Security number and claiming a refund. Alas, we paid it.

Be patient while an agency long understaffed and underfunded and recently overwhelmed by the COVID-19 pandemic undertakes what could prove to be an interminable investigation. While you should eventually get the refund to which you’re entitled, it will be injurious to your health if you inhale and remain that way until that happens.”

Suppose instead that the tax-savvy trio submits 1040s that show a balance due. Each 1040 is accompanied by a check for the amount owed. By the time their genuine returns reach the IRS, it already received fraudulent ones that show their names and Social Security numbers and claim refunds that a snookered IRS promptly paid.

How do things turn out when it’s a balance-due scenario? Patty, Maxene and LaVerne receive terse responses from the IRS that might be worded like this: “We’ve already received a return from you, or so we thought. Still, we’ll accept your return and cash your check.”

Cue enlightened IRS sleuths. They’re tasked with tracking down the thieves, which isn’t a concern for our trio.

Still, it’s prudent for them to determine whether the thieves accomplished other schemes—for instance, obtained loans or made purchases in their names. This would be a good moment to check their credit reports.

IRS help, sort of. IRS Publication 5027, Identity Theft Information for Taxpayers, available at irs.gov, mentions, among other things, what taxpayers should do to avoid becoming theft victims.

Dear Readers, a rhetorical question: Does Pub. 5027 mention submission of a 1040 that shows a balance due? Or is that a bridge too far? Cue “Quoth the Raven, Nevermore” from Edgar Allan Poe’s “The Raven.”

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 350 and counting). 

Replies (4)

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By stevenheizmann
Jul 3rd 2020 01:20

Misleading title.

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Replying to stevenheizmann:
Julian Block
By Julian Block
Jul 3rd 2020 15:57

Include me among those who defer to you.

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By SkinnVinny
Jul 6th 2020 20:24

Good advice. I'd much rather have a small balance due, rather than a refund, even if it means paying a little failure to estimate penalty. When any third party owes you money, not just the IRS, they have leverage.

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Replying to SkinnVinny:
Julian Block
By Julian Block
Jul 7th 2020 13:46

I appreciate and agree with your comment.

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