IRS Identity Theft Efforts and 2013 Filing Season. Dennis Bell February 6, 2013

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1 IRS Identity Theft Efforts and 2013 Filing Season Dennis Bell February 6, 2013

2 Identity Theft It is not a new problem

3 The most misused SSN of all time Happened more than 70 years ago Involved Social Security cards issued by Woolworth At peak, nearly 5,800 people were using this SSN More than 40,000 reported this as their own SSN As late as 1977, 12 people were still using the SSN

4 A persistent threat to taxpayers Identity theft: number one consumer complaint reported to FTC Incidents related to government benefits most common more complex and require more time and money to detect and resolve Over the past few years, the IRS has seen an increase in refund fraud schemes in general and those involving identity theft in particular 4

5 How identity theft affects taxes Scenario 1: Refund-related crime Identity thief uses stolen SSN to file forged tax return and obtain refund early in the filing season. Scenario 2: Employment-related crime Identity thief uses a stolen SSN to obtain employment. 5

6 IRS response to identity theft Identity theft is a top priority for the IRS. We understand this is a frustrating situation for victims. While identity thieves steal the information from sources outside the tax system, the IRS is sometimes the first to inform an individual that identity theft has occurred. We are committed to continuing to improve our identity theft protection programs. 6

7 Combating tax-related identity theft Goal: prevent identity theft and detect refund fraud before it occurs and assist taxpayers who are victims Actions: Building on successes and making more improvements for the 2013 filing season We ve developed a comprehensive identity theft strategy focused on: Prevention and detection Protection Victim assistance 7

8 IRS protection efforts Identity theft indicators Business filters Combating refund fraud Taxpayer notification Locking tax accounts Identity Protection Personal Identification Numbers (IP PINs) 8

9 What is an identity theft indicator? Markers that are placed on a taxpayers account There are three types of markers that relate to identity theft Taxpayer Reported Tax Impact IRS Identified Taxpayer Reported No Tax Impact 9

10 What do identity theft indicators do? Prevent victims from facing the same problems every year Distinguish legitimate tax returns from fraudulent returns Identify and track tax-related identity theft problems Measure the problem, monitor victims accounts and develop processes to resolve problems 10

11 IRS business filters Business filters allow our automated IRS systems to check for inconsistencies or discrepancies that are questionable and may point to the possibility of a fraudulent return. IRS revised its screening filters to identify more bogus returns and decrease the number of legitimate taxpayers affected by identity theft. The questionable returns are reviewed manually to make the distinction between legitimate and fraudulent returns. Depending on the complexity of the situation, additional contact with the taxpayer, including authentication, may be necessary. While this could possibly delay the processing of the return and receipt of the refund, it s an important step to ensure that the legitimate tax return is processed. 11

12 Notifying identity theft victims Once the taxpayer s account is reviewed, adjusted, completely resolved, and an indicator is put on the account, the IRS sends a CP 01 notification letter to the taxpayer. The notification letter tells taxpayers they will receive an Identity Protection PIN. A subsequent letter provides the IP PIN. 12

13 Locking deceased taxpayers accounts Identity thieves sometimes use the SSN of deceased taxpayers to file fraudulent returns. If the deceased person does not have a filing requirement, IRS places a lock on the taxpayers account to prevent the SSN from being used as a primary taxpayer. Electronically filed return will reject Paper returns will receive a notice

14 Locking indicators on paper returns If the taxpayer files a paper return and there is a locking indicator present: The return will unpost, A CP 01H notice will be systemically sent to the taxpayer at the address shown on the return, and The return will be auto-voided. If the taxpayer is incorrectly identified as deceased, they must get a letter SSA 2458 from the Social Security Administration showing the date of death is corrected and provide it, along with identity validation and a signed copy of the tax return, to the IRS at the address shown on the letter. 14

15 Investigating refund fraud In January 2012, the IRS announced the results of a massive, national sweep cracking down on suspected identity theft perpetrators as part of a stepped-up effort against refund fraud and identity theft. In the spring of 2012, IRS announced a pilot initiative to share, with the authorization of the identity theft victim, tax information with local law enforcement officials in the state of Florida. We expanded the pilot to eight more states in September We expect that providing more information to local law enforcement will increase the number of arrests. 15

16 What does the IP PIN do? Allows legitimate return to bypass identity theft filters Prevents processing of fraudulent returns Helps minimize processing delays related to identity theft 16

17 Key IP PIN information The IP PIN is specific to the tax year A new IP PIN issued every year The IP PIN should not be confused with the electronic signature self-select PIN or the preparer s PTIN. 17

18 Receiving the IP PIN Beginning with TY 2012, most IP PIN notices will be systemic CP notices. This will reduce processing time and mailing errors. CP notices will be sent to the address of record with IRS If a taxpayer has changed their address since they filed their last tax return, they will need to file a Form 8822 to change their address with IRS In early November, taxpayers who are IP PIN eligible received a CP 01F notice notifying them of their eligibility to receive an IP PIN and basic information about the program. In mid December, taxpayers who are IP PIN eligible (including accounts resolved in November) will receive a CP 01A notice that contains the IP PIN and instructions for using it. 18

19 If the IP PIN is required but isn t used Electronic return will be rejected Taxpayer can request a replacement IP PIN Return may be resubmitted with IP PIN If a taxpayer lost their IP PIN and did not request a replacement, they must file a paper return 19

20 Lost or misplaced IP PINs Taxpayer (or qualified POA) should contact the IRS (800 number, IPSU or walk-in center). Starting with tax year 2012, the IRS will immediately issue the taxpayer a replacement IP PIN after identity validation. This replacement IP PIN will allow the taxpayer to e-file but will not allow the return to bypass the business filters. Returns with a replacement IP PIN will unpost for an additional review for the taxpayer s protection. 20

21 Identity Protection Specialized Unit The IPSU is the central point of contact for taxpayers who are reporting their identity as stolen - Toll-free number: Monday - Friday, 7 a.m. - 7 p.m. local time Taxpayers can: - Self-report they are victims before or after their tax accounts are affected. 21

22 Tax Practitioner Due Diligence Treasury Department Circular No. 230 (Rev ), Section 10.22, requires practitioners to: Exercise due diligence when preparing or assisting in the preparation of filings for submission to the IRS, and that they determine the correctness of the representations they make, both to the IRS and to clients Tax practitioners play a role in the protection of the integrity of the tax filing system through their efforts to authenticate the identity of their clients.

23 Helping clients avoid identity theft Ensure they safeguard their personal information Instruct them to regularly check credit reports and other financial records Remind them: The IRS does not initiate contact with taxpayers by to request personal or financial information. This includes electronic communication, such as text messages and social media channels 23

24 If a client experiences identity theft They should: Contact their financial institutions Contact the three credit bureaus to place a fraud alert and get free credit report copies File a police report with local law enforcement Contact the Federal Trade Commission: Contact the IRS; complete Form 14039, the Identity Theft Affidavit 24

25 2013 filing season improvements More than doubled filters to detect potential identity theft New review process when multiple refunds are issued to same address or account Expanding the partnership with financial institutions to reject questionable deposits Introducing a limited pilot process for further authenticating taxpayers identity before processing questionable returns. Further expanded the law enforcement pilot program, now in nine states, so identity theft victims can authorize the IRS to share information with local law enforcement.

26 2013 filing season improvements Additional assistors trained in identity theft issues Improved reject codes for locked accounts of deceased taxpayers Increased use of the account locking mechanism to prevent future misuse by identity thieves Enhanced functionality of the Identity Protection PIN Improved IP PIN replacement process 26

27 IRS s identity theft resources Go to IRS.gov and click on identity theft IRS works closely with: Federal Trade Commission s OnGuard Online Identity Theft Resource Center

28 Summary Enhancements for the 2013 filing season (TY12): Increased the effectiveness of filters to stop first-time and repeat perpetrators Improved locked account reject codes for deceased taxpayers Enhanced functionality of the Identity Protection PIN Improved IP PIN replacement process Improved IP PIN reject codes

29 Tax Schemes

30 What is a tax scheme? Sound too good to be true Substance over form are the most important words to remember before buying into any arrangements that promise to "eliminate" or "substantially reduce" tax liability.

31 Our goal Abusive Promotions and Preparers

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35 How do I know when to make a referral to the IRS? Typical schemes include promises to "eliminate" or "substantially reduce" tax liability, or promises free money in the form of tax credits or refunds. Overviews and examples of abusive tax schemes can be found on irs.gov. Publication Recognizing Illegal Tax Avoidance Schemes

36 Publication 3995

37 2012 Top five issues False or inflated business deductions False EITC Abusive Schedule A deductions 1099-OID Sham Businesses

38 Program to shut down schemes and scams

39 Examples of schemes An injunction permanently enjoined a promoter from selling audio tapes/cds and tickets to offshore seminars promoting bogus trust packages advocating fraudulent ways to eliminate one s income taxes.

40 Examples of schemes A preparer was enjoined for conducting a Form 1099-OID scheme consisting of $19 million in fraudulent refunds for more than 100 taxpayers. The preparer also allegedly requested more than $1.3 million in bogus refunds for himself.

41 Who are the Promoters? Preparers Salespersons Representatives Appraisers Seller of Legal Opinions

42 Contact information Internal Revenue Service Lead Development Center Stop MS Avila Road Laguna Niguel, California Fax: (949)

43 Questions? 43