CPE/CE. 1 Credit Hour. Identity Theft. Protect Your Clients Tax Year. Interactive Self-Study CPE/CE Course

Transcription

1 CPE/CE 1 Credit Hour Identity Theft Protect Your Clients 2012 Tax Year Interactive Self-Study CPE/CE Course

2 Course Overview Program Content: Publication Date: September Expiration Date: Field of Study: Program Level: Recommended Participants: Prerequisites: Advance Preparation: Type of Delivery Method: CPE/CE Credit Hours: Passing Grade: Record Retention: Content includes information about how to recognize fraudulent communication designed to look like official IRS correspondence, how to safely communicate client information by electronic means, as well as how to recognize illegitimate phone or fax communications. The study materials also describe signs that a client s identity may have been stolen and what steps to take if a client s information appears to have been fraudulently used. This course provides continuing professional education (CPE/CE) to enhance a preparer s competence in preparing tax returns and satisfies education requirements for one hour of federal tax law. The Final Exam must be completed online within one year from your date of purchase or shipment. See the Final Examination Instructions on the next page for information regarding final exam completion. Taxes. Overview. This course provides a general overview of the subject area from a broad perspective. It is appropriate for tax professionals at all organization levels. This course is recommended for tax professionals who prepare tax returns for compensation and other individuals who assist paid preparers. None. No advanced preparation is needed to complete this course. Interactive self-study. 1 Credit Hour. One 50-minute period equals one CPE/CE Credit Hour. Participants who answer a minimum of 70% correct on the final exam will be sent a Certificate of Completion via . See the Final Examination Instructions on the next page for further information regarding passing requirements and acquiring the Certificate of Completion. As an IRS-approved provider of continuing education, Tax Materials, Inc. will report successful completion of this course to the IRS. According to the IRS, at some point in the future, you will be able to view your completed continuing education credits through your online PTIN account. Complaint Resolution Policy: Please contact our customer service department toll-free at Refund Policy: Identity Theft Self-Study CPE/CE 30-day money-back guarantee. For information about our refund, complaint, and/or program cancellation policies, visit our website at Tax Materials, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: National Registry of CPE Sponsors ID Number Tax Materials, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a Quality Assurance Service (QAS) sponsor of continuing professional education. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding QAS program sponsors may be submitted to NASBA through its website: Our sponsor number is 054 In accordance with the standards set forth in Circular 230, section 10.6, CPE/CE credits have been granted based on a 50-minute hour. IRS Program Number is 7VT8K-T S Tax Materials, Inc. has been approved by the California Tax Education Council to offer the Identity Theft Self- Study CPE/CE Course 6193-CE-0018, which provides 1 hour of federal credit and 0 hours of state credit towards the annual continuing education requirement imposed by the State of California. A listing of additional requirements to register as a tax preparer may be obtained by contacting CTEC at P.O. Box 2890, Sacramento, CA, , toll-free by phone at , or on the internet at CTEC Course ID Number 6193-CE-0018 Copyright 2012 Tax Materials, Inc. All Rights Reserved TheTaxReview Identity Theft i

3 Identity Theft Self-Study CPE/CE Course Completion Instructions Helpful Hint: Attempt to relate your tax preparation experience with the information you are studying. By doing so, you will increase retention and maximize your results. Also, utilize the Notes sections to jot down reminders and information that will be helpful to you in your tax practice. Follow the instructions below: 1) Start each chapter by reading the Learning Objectives. 2) Read the course materials in the chapter. Pay close attention to: a) Key Facts: Information that is particularly pertinent to the Learning Objective. b) Examples: Review the examples to associate the information to real-world application. c) Notes: Many of the main points of the chapter are highlighted. Review the notes and try to relate the content with your experience. 3) Complete the Self-Quiz at the end of the chapter. The questions are broken out by Learning Objective. Review the Learning Objectives before completing each set of questions. Determine your progress by comparing your answers to the correct ones on the pages that follow. 4) After all chapters have been studied, and each Self-Quiz has been taken, complete the Final Exam located at the back of this instruction booklet. Final Examination Instructions Expiration Date Reminder: The Final Exam must be completed online within one year from your date of purchase or shipment. CPE/CE credits are not available when you complete the final exam more than one year after your date of purchase or shipment. All Final Exams are administered online at It is recommended that you review the Final Exam at the end of the course before taking it online. Final Exams mailed in will not be graded. Follow the instructions below: 1) Go to 2) Click on Take CPE/CE Final Exams, where you will find a location to log in to the Final Exam. 3) Enter your User Name in the self-study CPE/CE login location. The address associated with your account at Tax Materials, Inc. is your User Name. If you do not have an address, or have not provided one, please call our toll-free number at to be assigned a User Name. 4) Enter your Password. The zip code associated with your account is your password. If you are having difficulty logging onto the Final Exam, please call our toll-free number at ) Click the Get My Exams button. 6) You will be taken to the list of Final Exams. Select the Identity Theft CPE/CE Exam. First enter your First Name and Last Name. This is how your name will appear on your Certificate of Completion should you achieve a score of 70% or higher. Next enter your address. This is where the Certificate of Completion will be sent. Take the Final Exam. Read the questions carefully and answer them to the best of your ability. At the bottom of the exam, click on Submit when finished. You will instantly know if you have passed the test. If you failed, you are able to log on again and retake the test. If you passed, you will be ed the Certificate of Completion. Complete Evaluation Form Please provide suggestions and feedback regarding this CPE/CE course. The last page contains an Evaluation Form. After completion, please mail to: Tax Materials, Inc Minnetonka Ind. Rd., Ste. 221 Minnetonka, MN Thank you for helping us improve our CPE/CE course offerings! ii TheTaxReview Identity Theft

4 Learning Objectives / Table of Contents Learning Objective A Learning Objective A Advise clients about how to recognize and avoid identity theft scams. B Learning Objective B Take steps as a tax practitioner to adequately safeguard client information. C Learning Objective C Develop an effective response for a client who has been the victim of identity theft. Final Exam Course Evaluation TheTaxReview Identity Theft iii

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6 Identity Theft CPE/CE Learning Objectives Successful completion of this course will enable the participant to: A Advise clients about how to recognize and avoid identity theft scams. B Take steps as a tax practitioner to adequately safeguard client information. C Develop an effective response for a client who has been the victim of identity theft. Glossary Terms Phishing. Phishing is an identity theft scam usually carried out with an unsolicited or a fake internet website. A phishing operation illegally obtains personal information from victims. Zero wages. A common tax protester tactic is to claim zero wages by filing a corrected W-2 or Form Credit repair. An individual is allowed to view credit reports and take action toward correcting or updating a credit report. Some illegitimate credit counseling organizations run scams of their own. Learning Objective A Advise clients about how to recognize and avoid identity theft scams. Phony IRS s The scam. s direct the consumer to a web link that requests personal and financial information, such as Social Security number, bank account, or credit card numbers. The practice of tricking victims into revealing private personal and financial information over the internet is known as phishing for information. The IRS does not send out unsolicited s or ask for detailed personal and financial information. Additionally, the IRS never asks people for the PIN numbers, passwords, or similar secret access information for their credit card, bank, or other financial accounts. The information fraudulently obtained by scammers is used to steal the taxpayer s identity and then his or her financial assets. Generally, identity thieves use someone s personal data to steal his or her financial accounts, run up charges on the victim s existing credit cards, apply for new loans, credit cards, services, or benefits in the victim s name and even file fraudulent tax returns to obtain refunds rightfully belonging to the victim. IRS response. Recently, the IRS established an electronic mail box, phishing@ irs.gov, to receive copies of possibly fraudulent s involving misuse of the IRS name, logo, or website for investigation. Since the establishment of the mail box, the IRS has received more than 17,700 s from taxpayers reporting more The IRS does not send out unsolicited s or ask for detailed personal and financial information. TheTaxReview Identity Theft 1

7 NOTES than 240 separate phishing incidents. To date, investigations by the Treasury Inspector General for Tax Administration (TIGTA) have identified host sites in at least 27 different countries, as well as in the United States. recipients are asked to click on links to take them to the IRS website. The links appear authentic and connect the victim to sites that resemble the genuine IRS website. The sites then prompt the victim for personal identifiers, credit card numbers, PIN numbers, or similar financial information. The phony sites appear legitimate because most of the images and content are copied from actual pages on the genuine IRS website before being modified by the fraudsters to include their loaded questions. Other scams. The schemes have a few variations. In one, a bogus tells the recipient that he or she is eligible to receive a federal tax refund for a given amount (often $63.80) and sends the recipient to a website to complete a form to submit the tax refund request. The form then asks for the personal and financial information. The IRS does not notify taxpayers of refunds via . Additionally, taxpayers do not have to complete a special form or provide detailed financial information to obtain a refund. Refunds are based on information contained on the federal income tax return filed by the taxpayer. In another scheme, the states that the IRS Antifraud Commission has found that someone tried to pay their taxes through the Electronic Federal Tax Payment System, or EFTPS, using the recipient s credit card and that, as a result, some of the recipient s money was lost and the remaining funds were blocked. The contains visual elements copied from the genuine IRS website in an attempt to make the appear legitimate. The includes a link that sends the recipient to a website that asks the recipient to enter personal and financial information, such as Social Security number and account numbers, in order to unblock their funds. The IRS does not have an Antifraud Commission, does not have the authority to freeze a taxpayer s credit card or bank account because of potential theft or fraud perpetrated against the taxpayer, and does not use to initiate contact with taxpayers. A third, recent scheme, asks the recipient to wire thousands of dollars in order to retrieve the winnings on a lottery. One such instructed the recipient to wire $42,000 to retrieve the winnings on a British lottery. This used a simulated IRS letterhead with the actual address of an IRS office at 290 Broadway, Manhattan, New York, NY, in an attempt to persuade the recipient of the legitimacy of the . The IRS does not handle lottery distributions and does not initiate contact with taxpayers via . Additionally, lottery winnings are generally reported by the winner to the IRS with his or her annual federal income tax return, at which time any taxes due must be paid. The only genuine IRS website is 2 TheTaxReview Identity Theft

8 The Dirty Dozen The Dirty Dozen listing, compiled by the IRS each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns. NOTES Identity Theft Key Fact In response to growing identity theft concerns, the IRS has embarked on a comprehensive strategy that is focused on preventing, detecting, and resolving identity theft cases as soon as possible. In addition to the law enforcement crackdown, the IRS has stepped up its internal reviews to spot false tax returns before tax refunds are issued, as well as working to help victims of the identity theft refund schemes. The IRS is increasingly seeing identity thieves looking for ways to use a legitimate taxpayer s identity and personal information to file a tax return and claim a fraudulent refund. An IRS notice informing a taxpayer that more than one return was filed in the taxpayer s name, or that the taxpayer received wages from an unknown employer, may be the first tip-off the individual receives that he or she has been a victim of identity theft. Recently, 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. Working with the Justice Department s Tax Division and local U.S. Attorneys offices, the nationwide effort targeted 105 people in 23 states. Phishing Phishing is a scam typically carried out with the help of unsolicited or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft. Note that the IRS does not initiate contact with taxpayers by to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. Phishing is a scam typically carried out with the help of unsolicited or a fake website that poses as a legitimate site to lure in potential victims. Return Preparer Fraud About 60% of taxpayers will use tax professionals this year to prepare and file their tax returns. Most return preparers provide honest service to their clients. But as in any other business, there are also some who prey on unsuspecting taxpayers. Questionable return preparers have been known to skim off their clients refunds, charge inflated fees for return preparation services, and attract new clients by promising guaranteed or inflated refunds. Taxpayers should choose carefully when hiring a tax preparer. Federal courts have issued hundreds of TheTaxReview Identity Theft 3

9 NOTES With new foreign account reporting requirements being phased in over the next few years, hiding income offshore will become increasingly more difficult. injunctions ordering individuals to cease preparing returns, and the Department of Justice has pending complaints against many others. In 2012, every paid preparer needs to have a Preparer Tax Identification Number (PTIN) and enters it on the returns he or she prepares. Signals to watch for when dealing with an unscrupulous return preparer would include that they: Do not sign the return or place a Preparer Tax identification Number on it. Do not provide a copy of the tax return to the client. Promise larger than normal tax refunds. Charge a percentage of the refund amount as preparation fee. Require the client to split the refund to pay the preparation fee. Add forms the taxpayer has never filed before. Encourage the taxpayer to place false information on the return, such as false income, expenses and/or credits. Hiding Income Offshore Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts, or nominee entities, using debit cards, credit cards, or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities, or insurance plans for the same purpose. The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. Since 2009, 30,000 individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to bring their money back into the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore will become increasingly more difficult. The IRS recently reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2009 and 2011 programs. The IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced. The IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95% of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from upfront payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases. Free Money from the IRS and Tax Scams Involving Social Security Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches around the country. These schemes are also 4 TheTaxReview Identity Theft

10 often spread by word of mouth as unsuspecting and well-intentioned people tell their friends and relatives. Scammers prey on low-income individuals and the elderly. They build false hopes and charge people good money for bad advice. In the end, the victims discover their claims are rejected. Meanwhile, the promoters are long gone. The IRS warns all taxpayers to remain vigilant. There are a number of tax scams involving Social Security. For example, scammers have been known to lure the unsuspecting with promises of non-existent Social Security refunds or rebates. In another situation, a taxpayer may really be due a credit or refund but uses inflated information to complete the return. NOTES Scammers prey on low-income individuals and the elderly. False/Inflated Income and Expenses Including income that was never earned, either as wages or as self-employment income, in order to maximize refundable credits is another popular scam. Claiming income the taxpayer did not earn or expenses he or she did not pay in order to secure larger refundable credits, such as the Earned Income Credit, could have serious repercussions. This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution. Additionally, some taxpayers are filing excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. But other individuals have claimed the tax credit when their occupations or income levels make the claims unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000. False Form 1099 Refund Claims In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return. In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS. Some unscrupulous preparers encourage clients to claim deductions or credits to which they are not entitled or willingly allow others to use their information to file false returns. If a taxpayer is a party to such a scheme, the taxpayer could be liable for financial penalties or even face criminal prosecution. Frivolous Arguments Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are false and are regularly thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law. Some unscrupulous preparers encourage clients to claim deductions or credits to which they are not entitled or willingly allow others to use their information to file false returns. TheTaxReview Identity Theft 5

11 NOTES The IRS is investigating schemes that involve the donation of noncash assets, including situations in which several organizations claim the full value of the same noncash contribution. Falsely Claiming Zero Wages Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a corrected Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS. Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme. Filing this type of return may result in a $5,000 penalty. Abuse of Charitable Organizations and Deductions IRS examiners continue to uncover the intentional abuse of 501(c)(3) organizations, including arrangements that improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or the income from donated property. The IRS is investigating schemes that involve the donation of noncash assets, including situations in which several organizations claim the full value of the same noncash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new standards for qualified appraisals. Disguised Corporate Ownership Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business. These entities can be used to under report income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering, and financial crimes. The IRS is working with state authorities to identify these entities and bring the owners into compliance with the law. Misuse of Trusts For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are legitimate uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses, and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS. IRS personnel have seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement. 6 TheTaxReview Identity Theft

12 Targeting Senior Citizens College Tax Credit Refund Scam. The scheme carries a common theme of promising refunds to people who have little or no income and normally don t have a tax filing requirement. Under the scheme, promoters claim they can obtain for their victims, often senior citizens, a tax refund or nonexistent stimulus payment based on the American Opportunity Credit, even if the victim was not enrolled in or paying for college. The IRS has identified and stopped an upsurge of these bogus refund claims coming in from across the United States. The IRS is actively investigating the sources of the scheme, and its promoters may be subject to criminal prosecution. Typically, con artists falsely claim that refunds are available even if the victim went to school decades ago. In many cases, scammers are targeting seniors, people with very low incomes, and members of church congregations with bogus promises of free money. The IRS has also seen a variation of this scheme that incorrectly claims the college credit is available to compensate people for paying taxes on groceries. The IRS is reminding people that all taxpayers, including those who use paid tax preparers, are legally responsible for the accuracy of their returns and must repay any refunds received in error. Key Fact Taxpayers should beware of any of the following. Fictitious claims for refunds or rebates based on false statements of entitlement to tax credits. Unfamiliar for-profit tax services selling refund and credit schemes to the membership of local churches. Internet solicitations that direct individuals to toll-free numbers and then solicit Social Security numbers. Homemade flyers and brochures implying credits or refunds are available without proof of eligibility. Offers of free money with no documentation required. Promises of refunds for Low Income No Documents Tax Returns. Claims for the expired Economic Recovery Credit Program or for economic stimulus payments. Unsolicited offers to prepare a return and split the refund. Unfamiliar return preparation firms soliciting business from cities outside the normal business or commuting area. NOTES Typically, con artists falsely claim that refunds are available even if the victim went to school decades ago. TheTaxReview Identity Theft 7

13 NOTES Authorized IRS e-file providers must appoint an individual as a Responsible Official who is responsible for ensuring the firm meets IRS e-file rules and requirements. System components is defined as any network component, server, or application that is included in, or connected to, the taxpayer data environment. Learning Objective B Take steps as a tax practitioner to adequately safeguard client information. Safeguarding IRS e-file Authorized IRS e-file providers must appoint an individual as a Responsible Official who is responsible for ensuring the firm meets IRS e-file rules and requirements. Providers with problems involving fraud and abuse may be suspended or expelled from participation in IRS e-file, be assessed civil and preparer penalties, or be subject to legal action. IRS e-file Security and Privacy Standards The IRS has developed six security and privacy standards to better protect taxpayer information collected, processed, and stored by providers participating in online filing of individual income tax returns. The IRS strongly encourages providers participating in online filing of individual income tax returns to adhere to the standards. 1) Extended Validation Secure Socket Layer (SSL) Certificate. This standard applies to authorized IRS e-file providers that collect taxpayer information via the internet. These providers should possess a valid and current Extended Validation Secure Socket Layer (SSL) certificate using SSL 3.0 / TLS 1.0 or later and minimum 1024-bit RSA / 128-bit AES. 2) External Vulnerability Scan. This standard applies to authorized IRS e-file providers that collect, transmit, process, or store taxpayer information. These providers should contract with an independent third-party vendor to run weekly external network vulnerability scans of all their system components in accordance with the applicable requirements of the Payment Card Industry Data Security Standards (PCIDSS). All scans should be performed by a scanning vendor certified by the Payment Card Industry Security Standards Council and listed on their current list of Approved Scanning Vendors (ASV). In addition, providers whose systems are hosted should ensure their host complies with all applicable requirements of the PCIDSS. For the purposes of this standard, system components is defined as any network component, server, or application that is included in, or connected to, the taxpayer data environment. The taxpayer data environment is that part of the network that possesses taxpayer data or sensitive authentication data. If scan reports reveal vulnerabilities, action should be taken to address the vulnerabilities in line with the scan report s recommendations. Retain weekly scan reports for at least one year. The ASV and the host (if present) should be located in the United States. 8 TheTaxReview Identity Theft

14 3) Information Privacy and Safeguard Policies. This standard applies to authorized IRS e-file providers that own or operate a website through which taxpayer information is collected, transmitted, processed, or stored. These providers should have a written information privacy and safeguard policy consistent with the applicable government and industry guidelines and including the following statement. We maintain physical, electronic and procedural safeguards that comply with applicable law and federal standards. 4) Website Challenge-Response Test. This standard applies to authorized IRS e-file providers that own or operate a website through which taxpayer information is collected, transmitted, processed, or stored. These providers should implement an effective challenge-response protocol (e.g., CAPTCHA) to protect their website against malicious bots. Taxpayer information should not be collected, transmitted, processed, or stored unless the user successfully completes this challenge-response test. 5) Public Domain Name Registration. This standard applies to authorized IRS e-file providers that own or operate a website through which taxpayer information is collected, transmitted, processed, or stored. These providers should have their website s domain name registered with a domain name registrar that is located in the United States and accredited by the Internet Corporation for Assigned Names and Numbers (ICANN). The domain name should be locked and not be private. 6) Reporting of Security Incidents. This standard applies to authorized IRS e-file providers that collect, transmit, process, or store taxpayer information. These providers should report security incidents to the IRS as soon as possible, but not later than the next business day after confirmation of the incident. For the purposes of this standard, an event that can result in an unauthorized disclosure, misuse, modification, or destruction of taxpayer information should be considered a reportable security incident. See IRS Publication 1345, Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns, for submitting incident reports. In addition, if the provider s website is the proximate cause of the incident, the provider should cease collecting taxpayer information via their website immediately upon detection of the incident and until the underlying causes of the incident are successfully resolved. NOTES TheTaxReview Identity Theft 9

15 NOTES No one can remove accurate negative information from a credit report. Learning Objective C Develop an effective response for a client who has been the victim of identity theft. Credit Repair Scams Credit repair scams target consumers who have poor credit histories with promises to clean up their credit report so they can get a car loan, a home mortgage, insurance, or even a job once they pay them a fee for the service. The truth is these companies can t deliver an improved credit report using the tactics they promote. No one can remove accurate negative information from a credit report. After paying hundreds or thousands of dollars in fees, the victim is left with the same credit report and someone else has their money. Key Fact Signs that a credit repair company might be a scam. Be on the lookout for the following signs that a credit repair company is not legitimate. The company wants the individual to pay for credit repair services before any services are provided. Under the Credit Repair Organizations Act, credit repair companies cannot require an individual to pay until the company has completed the services they have promised. The company doesn t explain the individual s rights and what the person can do themselves for free. The company recommends the individual does not contact any of the three major national credit reporting companies directly. The company tells the individual they can get rid of most or all of the negative credit information in the individual s credit report, even if that information is accurate and current. The company suggests the individual try to create a new identity, and a new credit report, by applying for an Employer Identification Number (EIN) to use instead of a Social Security number. The company advises the individual to dispute all the information in the credit report regardless of its accuracy or timeliness. An individual who follows the illegal advice may commit fraud in doing so. An individual who follows the illegal advice may commit fraud in doing so. It is a federal crime to lie on a loan or credit application, to misrepresent an individual s Social Security number, and to obtain an EIN under false pretenses. The individual could be charged with mail or wire fraud for illegally applying for credit using false information. Rights Regarding Credit Repair By law individuals are allowed to ask for an investigation of information in the credit file that the person disputes as inaccurate or incomplete. There is no charge for this. A company may be hired to investigate on the individual s behalf, but the individual can accomplish anything a credit repair clinic can do at little or no cost. According to the Fair Credit Reporting Act (FCRA): 10 TheTaxReview Identity Theft

16 An individual is entitled to a free credit report if a company takes adverse action against the person, such as denying an application for credit, insurance, or employment. The individual has 60 days after receiving the notice of action to request the free report. The notice will provide the name, address, and phone number of the consumer reporting agency. Each of the nationwide consumer reporting companies Equifax, Experian, and TransUnion is required to provide a free copy of a credit report upon request once every 12 months. There is no cost to disputing mistakes or outdated information on a credit report. Under the FCRA, both the consumer reporting company and the information provider are responsible for correcting inaccurate or incomplete information in the report. NOTES Key Fact Obtaining a free credit report. Equifax, Experian, and TransUnion share a centralized website, toll-free phone number, and mailing address for consumers to order free annual credit reports. Website: annualcreditreport.com Telephone: Mailing address: Annual Credit Report Request Service, P.O. Box , Atlanta, GA Steps to Take in Case of Identity Theft 1) Report the crime to the police immediately. Get a copy of the police report or case number. Credit card companies, the bank, or insurance company may ask for the reference to verify the crime. 2) Immediately contact the credit card issuers. Get replacement cards with new account numbers and ask that the old account be processed as account closed at consumer s request for credit record purposes. Follow up the telephone conversation with a letter to the credit card company that summarizes the request in writing. 3) Call the fraud units of the three credit reporting bureaus. Report the theft of credit cards and/or numbers. Ask that the accounts be flagged. Also, add a victim s statement to the report requesting contact to verify future credit applications. Equifax Credit Information Services Consumer Fraud Division P.O. Box , Atlanta, GA Call: (888) Website: Experian P.O. Box 2104, Allen, TX Call: (888) EXPERIAN ( ) Website: Trans Union Fraud Victim Assistance Department P.O. Box 6790, Fullerton, CA Call: (800) Website: TheTaxReview Identity Theft 11

17 NOTES Even some services claiming nonprofit status charge high fees or hide their fees by pressuring consumers to make voluntary contributions that only add to their debt. 4) Notify the Social Security Administration s Office of Inspector General if the Social Security number has been used fraudulently. 5) File a complaint with the Federal Trade Commission. By phone: Toll-free ID-THEFT ( ), TDD By mail: Consumer Response Center, Federal Trade Commission, 600 Pennsylvania Ave. NW, Washington, DC Website: Other Sources of Assistance Many legitimate credit counseling organizations can provide assistance to individuals with credit problems. However, beware of illegitimate services. Even some services claiming nonprofit status charge high fees or hide their fees by pressuring consumers to make voluntary contributions that only add to their debt. Most credit counselors offer services through local offices, the internet, or by telephone. In-person counseling is often the most effective. Many universities, military bases, credit unions, and branches of the U.S. Cooperative Extension Service operate nonprofit counseling programs. The individual s financial institution or local consumer protection agency may be good resources for referral to a legitimate credit counseling organization. Crackdown Against Refund Fraud and Identity Theft The Internal Revenue Service and the Justice Department recently 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. Working with the Justice Department s Tax Division and local U.S. Attorneys offices, the nationwide effort targeted 105 people in 23 states. The coast-tocoast effort included indictments, arrests, and the execution of search warrants involving the potential theft of thousands of identities and taxpayer refunds. In all, 939 criminal charges are included in the 69 indictments and information related to identity theft. In addition, IRS auditors and investigators conducted extensive compliance visits to money service businesses in nine locations across the country. The approximately 150 visits occurred to help ensure these check-cashing facilities aren t facilitating refund fraud and identity theft. Key Fact Comprehensive strategy. The national effort is part of a comprehensive identity theft strategy the IRS has embarked on that is focused on preventing, detecting and resolving identity theft cases as soon as possible. In addition to the law enforcement crackdown, the IRS has stepped up its internal reviews to spot false tax returns before tax refunds are issued, as well as working to help victims of the identity theft refund schemes. continued on next page 12 TheTaxReview Identity Theft

18 Key Fact continued Beyond the criminal actions, the IRS enforcement personnel conducted a special sweep to visit 150 money services businesses to help make sure the businesses are not knowingly or unknowingly facilitating identity theft or refund fraud. The visits occurred in nine high-risk places identified by the IRS covering areas in and surrounding Atlanta, GA, Birmingham, AL, Chicago, IL, Los Angeles, CA, Miami, FL, New York, NY, Phoenix, AZ, Tampa, FL, and Washington, DC. In addition, the IRS has more than 250 check-cashing operations under audit across the country and will be looking for indicators of identity theft as part of the exam effort. The information from these audits and compliance visits will be used to assist continuing IRS investigations into refund fraud and identity theft. The IRS also is taking a number of additional steps to prevent identity theft and detect refund fraud before it occurs. These efforts include designing new identity theft screening filters that will improve the IRS ability to spot false returns before they are processed and before a refund is issued, as well as expanded efforts to place identity theft indicators on taxpayer accounts to track and manage identity theft incidents. NOTES IRS Identity Theft Protection Unit. If a taxpayer receives a notice from the IRS indicating identity theft, he or she should follow the instructions in that notice. A taxpayer who believes there is a risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure his or her tax account. The taxpayer should contact the IRS Identity Protection Specialized Unit at The taxpayer will be asked to complete Form 14039, Identity Theft Affidavit, and follow the instructions on the back of the form based on the situation. Identity Protection PIN (IP PIN) Program Individuals who are victims of identity theft can report the incident to the IRS Identity Protection Specialized Unit (IPSU) at The individual will be asked to submit documentation to validate their identity. If the taxpayer does have a tax related identity theft problem, the IPSU will research the account, identify the IRS business unit handling the case, and monitor the case to ensure it is being handled in a timely manner. The IRS will then identify those taxpayers who will receive an Identity Protection PIN. The inclusion of the IP PIN on the taxpayer s tax return acts as an authenticator that validates that the taxpayer was the legitimate owner of the TIN on the tax return. The IP PIN is computer generated and specific to the tax year for which it was provided. A new IP PIN will be issued to the taxpayer every filing season for as long as the identity theft indicator remains on their account. TheTaxReview Identity Theft 13

19 NOTES The IP PIN will be auto-generated based on the taxpayer s validated account information. An IRS notice to the taxpayer will contain a single-use six-digit PIN that contains six numbers and may begin with a zero. In order for the IP- PIN to be accepted, all six digits must be input on the taxpayer s Form 1040, to the right of the spouse s occupation line. The IP PIN is not visible to IRS employees and it will not be possible for taxpayers to receive another IP PIN if they lose or misplace the letter. Taxpayers who do not have their IP PIN will be instructed to file a paper return without the IP PIN. However, taxpayers will be cautioned they may experience a significant delay in processing of their return and any refund, if they are entitled to one. Self-Quiz True/False 1) The IRS Antifraud Commission is focused mainly on illegitimate transfers involving the Electronic Federal Tax Payment System (EFTPS). True False 2) Some scams involve falsely reporting inflated income on a taxpayer s return. True False 3) An individual is entitled to a free credit report once every 12 months from one of the three major credit reporting organizations in the United States. True False Multiple Choice 1) The IRS has the following safeguard to protect taxpayers when requesting personal information via . a) The IRS does not initiate contact with taxpayers via to request personal information. b) Any IRS containing a request for personal information includes a phone number to call a representative for verification. c) Any request for personal information from the IRS includes a link to a secure website for the taxpayer to enter the information. d) The IRS contacts taxpayers requesting personal information only in cases where payroll reporting payments are involved. 14 TheTaxReview Identity Theft

20 2) The following is an indication that a credit repair service might not be legitimate. a) The company wants the individual to pay for services before any services are provided. b) The company doesn t explain what the individual could do for free. c) The company recommends the individual not contact any of the three major national credit reporting companies directly. d) All of the above. 3) If a taxpayer loses his or her Identity Protection PIN, a replacement PIN can be obtained in the following manner. a) The taxpayer can call the IRS Identity Theft Protection Specialized Unit. Once their identity is verified, the IRS will issue a new PIN over the phone. b) The taxpayer can call the IRS Identity Theft Protection Specialized Unit. The IRS will then send the taxpayer another letter showing the original Identity Protection PIN. c) The taxpayer can file Form 14039, Identity Theft Affidavit, to apply for a replacement PIN. d) It is not possible for a taxpayer to receive a replacement Identity Protection PIN if the original was lost or stolen. NOTES TheTaxReview Identity Theft 15

21 NOTES Self-Quiz Answers True/False 1) The IRS Antifraud Commission is focused mainly on illegitimate transfers involving the Electronic Federal Tax Payment System (EFTPS). True Incorrect. A scam uses an supposedly from the IRS Antifraud Commission to obtain an individual s private information. The IRS does not have an Antifraud Commision. False Correct. The IRS does not have an Antifraud Commision. 2) Some scams involve falsely reporting inflated income on a taxpayer s return. True Correct. Reporting false income on a tax return can increase refundable credits such as the Earned Income Credit. False Incorrect. Although reporting higher income can increase tax liability, it can also increase refundable credits. Claiming of false income to increase the Earned Income Credit has been increasing the past several years. 3) An individual is entitled to a free credit report once every 12 months from one of the three major credit reporting organizations in the United States. True Correct. An individual is entitled to a free credit report from Equifax, Experian, or TransUnion once every 12 months. False Incorrect. An individual can go to to receive a free copy of their credit report once every 12 months. Multiple Choice 1) The IRS has the following safeguard to protect taxpayers when requesting personal information via . a) The IRS does not initiate contact with taxpayers via to request personal information. Correct. The IRS does not request a taxpayer s personal information by electronic means, including , text messages, or social media channels. b) Any IRS containing a request for personal information includes a phone number to call a representative for verification. Incorrect. The IRS does not initiate contact with a taxpayer via to request personal information. c) Any request for personal information from the IRS includes a link to a secure website for the taxpayer to enter the information. Incorrect. The IRS does not initiate contact with a taxpayer via to request personal information. Often, scams will provide links in s that are designed to fraudulently obtain personal taxpayer information. 16 TheTaxReview Identity Theft

22 d) The IRS contacts taxpayers requesting personal information only in cases where payroll reporting payments are involved. Incorrect. Filing false Forms 1099 and W-2 are often part of a scam. The IRS does not initiate contact with a taxpayer via to request personal information. NOTES 2) The following is an indication that a credit repair service might not be legitimate. a) The company wants the individual to pay for services before any services are provided. Incorrect. Answers (a), (b), and (c) are all correct. b) The company doesn t explain what the individual could do for free. Incorrect. Answers (a), (b), and (c) are all correct. c) The company recommends the individual not contact any of the three major national credit reporting companies directly. Incorrect. Answers (a), (b), and (c) are all correct. d) All of the above. Correct. Answers (a), (b), and (c) are all correct. 3) If a taxpayer loses his or her Identity Protection PIN, a replacement PIN can be obtained in the following manner. a) The taxpayer can call the IRS Identity Theft Protection Specialized Unit. Once their identity is verified, the IRS will issue a new PIN over the phone. Incorrect. The taxpayer receives an original Identity Protection PIN by contacting the IRS Identity Theft Protection Specialized Unit, but if the PIN issued is lost, a new one will not be issued. b) The taxpayer can call the IRS Identity Theft Protection Specialized Unit. The IRS will then send the taxpayer another letter showing the original Identity Protection PIN. Incorrect. Each Identity Protection PIN is a single-use PIN. If the PIN issued is lost, a new one will not be issued. c) The taxpayer can file Form 14039, Identity Theft Affidavit, to apply for a replacement PIN. Incorrect. Form is filed to notify the IRS that the taxpayer is a victim or potential victim of identity theft. The form is not used to apply for an Identity Protection PIN. d) It is not possible for a taxpayer to receive a replacement Identity Protection PIN if the original was lost or stolen. Correct. The Identity Protection PIN is computer generated and is not visible to IRS employees. If the PIN is lost it will not be replaced. TheTaxReview Identity Theft 17