Tax & Accounting Blog

Congress is Proposing New Measures in Effort to Curb Identity Theft

Blog, ONESOURCE September 29, 2015

You know it’s a slow news day when you’re reading articles from the Joint Committee on Taxation! Currently, the big topic of conversation is 18 new proposals on identity theft and tax refund fraud prevention.

The IRS is continuously combating tax-related identity theft cases and looking for strategies to improve its defenses for taxpayers and payers. One thing is for sure, the new proposals outlined by Congress are designed to protect taxpayers and payers from identity theft or help in the recovery process if they fall victim.

Confession: I have to admit, the topic of identity theft and fraud is really interesting to me. It just fascinates me how much work a person will go through to cheat others out of their money. They’re obviously very resourceful and smart people; just image if they used that power for good!

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What do the new proposals mean for taxpayers?

Throughout my career, I’ve worked numerous identity theft cases. One of the hazards of the job is calling a taxpayer to inform them they are a victim of identity theft or tax fraud. After breaking the news, its standard to direct them to the Department of Treasury to file an affidavit on identity theft and begin the long recovery process. Under the new proposals, the IRS and the Office of the National Taxpayer Advocate have new guidance on how to process cases faster and free up pending taxpayer returns. For instance, one proposal recommends blocking electronic filing acceptance if the taxpayer has filed an affidavit. For the victim this means the bad guy can’t file your information again through electronic filing. In my opinion, the IRS may need to conduct a feasibility study on this. To play the devil’s advocate here, this could slow down your return and force the bad guy to print the tax return and mail it in. If he/she beats you to the filing, then they can still win.

Another proposal is to allow taxpayers to request IP PINs. Then, if the bad guy files without your super-secret PIN, they get nothing. Now that seems like a more fool-proof plan.

What about the Payers?

We know that many tax forms allow for truncated taxpayer SSNs while other tax forms do not (yikes). If this proposal is passed, truncated SSNs on all your W-2 is mandate. You may not think that is a big deal, but bad guys know when those W-2s go out and they can be the Holy Grail for identity thieves. A little mailbox diving in January and those W-2 forms have everything they need.

If you are not familiar with tax reporting and filing, the IRS basically operates on a trust but verify basis. Your W-2 and 1099s come to you in January, but the payers do not have to actually file those forms with the IRS until March 31st if they file electronically. And, many forms are allowed an automatic 30 day extension which is actually going away soon for many forms. With the extension, now payers have until April 30th to file forms. The problem is that if a bad guy gets your identity, they are going to file before you and before the payer files the data. The IRS trusts your honesty in filing and processes your refund. When you go to actually file, the IRS declines you because you already “filed.”

When the IRS gets the file from the payer, they see that you got too much of a refund and come after you. What a mess! The only way to fix this is to have that filing to the IRS quicker. This proposal requires that payers file the forms with the IRS within 15 days of the due date for the taxpayer statement. Wait, what? So instead of having until April 30th, now the payer needs to file by February 15th? Getting W-2s to the IRS by mid-February will make the payers scramble and none too happy. But, from a taxpayer perspective, it’s awesome.

The last item of interest is the proposed de minimis rule for statement corrections. Today, if you received a 1099 form with a reportable amount and it later gets corrected, up or down, for as little as a penny, the payer must send you, and the IRS, a corrected form. With this, the payer could be subject to penalty for failure to report the accurate amount. With the de minimis proposal, the changed amount would have to be greater than $100 for reportable funds, or greater than $25 in backup withheld funds. This would greatly reduce the number of corrections the IRS receives every year.

What’s the conclusion?

I do want to mention that all of these proposals are just that: proposals. Nothing is confirmed or set in stone. And, you’ve heard the song and know what happens to Bills on Capitol Hill! Time will tell if these make it through.

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