Tax-Related Identity Theft: Are You Prepared To Assist Your Client?
This article was written by Trenda Hackett, Senior Technical Tax Editor at Thomson Reuters.
As we approach the 2018 filing season, chances are you will have a client that experience tax-related identity theft. As your client’s tax professional and trusted advisor, it’s crucial to understand how this type of theft can be identified and how to assist your client.
In general, tax-related identity theft occurs when someone uses the personal identifying information of another person to file a false tax return to obtain a fraudulent refund. This type of identity theft can be identified in 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 1.3 million suspicious tax returns during the 2017 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 5747C, Letter 4883C, Letter 5071C, or Notice CP01B) alerting them of the return filing and requesting that they verify their identity and the filing or non-filing of the tax return.
The downside to the screening process is that many taxpayers’ returns are incorrectly suspended. With a false positive rate of 53 percent, over half of the tax 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 to assist your client. If your client receives a letter (Letter 5071C, Letter 4883C, or Notice CP01B) from the IRS alerting them of a return filed on their behalf and requesting them to verify their identity, they will be required to verify their identity 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. Your client has 30 days to respond to the letter or notice from the IRS. The IRS representative will ask a series of “out of the wallet” questions that only the real taxpayer is likely to know. Your client should have their prior year tax return and their current year tax return available, if they filed one, 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 receives Letter 5747C or if they are unable to verify their identity over the phone, a visit to the nearest TAC office will be required to verify identity. To visit a TAC office, your client must first make an appointment. The following steps are required to make an appointment with a Taxpayer Assistance Center (TAC):
- Find the location of the nearest TAC by visiting gov. Note: Be on the lookout for TAC offices listed as “Virtual Services Provided”, do NOT go to these offices)
- Call 844-545-5640 to schedule an appointment
If your client is unable to visit a TAC office due to distance or incapacity, they should take the following steps:
- Call the IRS at the number provided in the letter to explain the reason for not being able to visit the TAC office in person.
- Mail legible copies of the supporting documentation listed below along with a copy of the IRS letter received and an explanation of the reason your client is unable to visit the TAC office, to the following address:
Internal Revenue Service
Stop 6579 AUSC
Austin, TX 78741
Note: According to the IRS, allow nine weeks from the date information mailed to receive refund or additional correspondence.
Supporting documentation: The following information should be provided when visiting a TAC office or sending information in the mail to verify identity:
- Clear, legible, unexpired photo identification (drivers license, passport, state ID card)
- Copy of the IRS letter received
- Copy of prior year tax return and current year tax return, if filed
- Supporting documents such as Forms W-2 and 1099 and Schedules A and C, if applicable
Typical response times. If your client contacts the IRS and confirms that an identity theft has occurred, it can take 180 days or more to resolve the case and have the refund released. However, if your client confirms that no identity theft has occurred, the IRS will process the return and issue the refund in approximately six weeks. For 2017, the average wait time on the TPP line in an identity theft situation initiated by the IRS was 7.4 minutes.
2) Taxpayer initiated.
If your client attempted to file a tax return and it was rejected because a return was already filed in their name and social security number, 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 to assist 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 according to the instructions.
In the case of a tax return rejected due to duplicate filing, a paper return will be required. Mail the paper return to the appropriate IRS Service Center along with Form 14039, Identity Theft Affidavit and Form 8948, Preparer Explanation for Not Filing Electronically and required documentation attached to the front of the return
Typical response times. Once your client has reported the identity theft to the IRS and sent in Form 14039, it can take 180 days or more to resolve the case and issue the refund. For 2017, the average wait time on the IPSU line in an identity theft situation initiated by the taxpayer was 8.3 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 have made repeated attempts to contact the IRS and no one has responded or haven’t heard from IRS in the timeframe promised, they should contact the National Taxpayer Advocate (NTA) office at 877-777-4778 to speak to a live representative. For 2017, the average wait time on the NTA line was 2.7 minutes. In extreme cases, your client can contact or visit their local Taxpayer Advocate Office.
Step-by-step guide to assisting victims of tax-related identity theft
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.
For a comprehensive step-by-step guide and practical aids in assisting victims of tax-related identity theft and dealing with security breach issues at both the federal and state levels, checkout the PPC Guide to Tax-Related Identity Theft.
Reference: Statistics in this article were pulled from the 2018 National Taxpayer Advocate Objectives Report to Congress