A persistent threat to taxpayers. IRS Identity Theft Efforts and 2013 Filing Season Improvements 4/10/2013. The most misused SSN of all time

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1 IRS Identity Theft Efforts and 2013 Filing Season Improvements Ley Mills IRS CSO SL/Field April 2013 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 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 3 1

2 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. 4 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. 5 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 6 2

3 2012 filing season successes Developed more new filters to stop questionable returns and new tools to prevent misuse of a decedent SSN Issued more IP PINs; improved IP PIN functionality Expanded outreach to and partnerships with preparers, software developers and financial institutions Accelerated matching of individual returns and related information returns (e.g. Form 1040 against Form W-2) Worked with DOJ Tax Division on directive authorizing U.S. Attorney s Office to expedite investigations and prosecutions Established law enforcement pilot program and conducted a highly successful identity theft enforcement sweep. IRS protection efforts Identity theft indicators Business filters Combating refund fraud Taxpayer notification Locking tax accounts Identity Protection Personal Identification Numbers (IP PINs) 8 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 3

4 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 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 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 4

5 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 Improved reject codes for locked accounts of deceased taxpayers MeF reject codes related to locked accounts are more specific IND 901: The primary SSN in the return header has been locked because the Social Security Administration records indicate that the number belongs to a deceased individual IND 941: The spouse SSN in the return header has been locked because the Social Security Administration records indicate that the number belongs to a deceased individual 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. 15 5

6 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. 16 Identity Protection PIN IP PIN is a six-digit number assigned to certain taxpayers who: Were identified as identity theft victims Submitted required documentation Had their account issues resolved Not all taxpayers with identity theft indicators on their account received IP PINs for tax year 2011 because the 2011 program was a limited expansion of a 2010 pilot. For tax year 2012, the IRS is further expanding IP PINs to more taxpayers 17 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 18 6

7 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. 19 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. 20 Key IP PIN information Only the primary taxpayer on any return is affected by the IP PIN and only the primary taxpayer on the return must input the IP PIN if they received a CP 01A with an IP PIN. If the primary taxpayer on the return did not receive an IP PIN, any information included on the return as an IP PIN will have no effect on the filing of the return. If the primary taxpayer on the return received an IP PIN, the IP PIN must be both present and correct in order to e-file the tax return. 21 7

8 Using the IP PIN on joint returns If the primary taxpayer on the return received an IP PIN, the IP PIN must be both present and correct in order to e-file the tax return. If the spouse taxpayer on the return received an IP PIN, they do not need to enter the IP PIN on the return and do not need to change their order of filing. The spouse will continue to be protected by preventing a thief from filing a tax return using the spouse s SSN as the primary SSN. If both taxpayers receive an IP PIN only the primary taxpayer should include their IP PIN on the return. 22 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 23 IP PINs and new MeF reject codes If the IP PIN is required and present, but not correct: IND 180: The Identity Protection Personal Identification Number (IP PIN) must match the e-file database. Please double check your entry and resubmit your return with the correct number. If the IP PIN is required but not present: IND 181: The primary taxpayer did not enter a valid Identity Protection Personal Identification Number (IP PIN). Please refer to Notice CP 01A for further information and resubmit your return with the correct number if applicable. 24 8

9 Using tax preparation software Interview-driven software asks for IP PINs and provides instructions Forms-based software provides guidance on IP PIN location Using tax preparation software to print/file paper return: IP PIN should not print as part of tax return s record on paper copies to be mailed Taxpayer should write IP PIN in the space provided the appropriate 1040 series form or on 25 IP PIN placement on paper returns Six boxes to right of spouse s occupation 26 IP PIN guidance for tax professionals Ask every client if they received a letter from the IRS containing an IP PIN If so, input the IP PIN in the proper area Check with your software provider for the location for the IP PIN If your client says they did not receive an IP PIN letter, continue preparation as usual 27 9

10 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. 28 Victim assistance efforts Speed up case resolution Provide more training for employees who assist victims of identity theft Step up outreach and education so taxpayers can prevent and resolve taxrelated identity theft issues quickly 29 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

11 IRS specialized groups Functions within the IRS are developing specialized groups consisting of employees dedicated to resolving identity theft issues. These groups benefit the taxpayer by: Streamlining processing for identity theft returns Single point of contact once a case has commenced Prioritization of all identity theft cases Enhanced communication with the taxpayer 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. 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 33 11

12 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 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 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 36 12

13 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 Summary IRS is dedicated to both preventing identity theft and reducing the burden on affected taxpayers. Current efforts include: Use of filters to identify potential fraudulent returns before they post Use of identity theft indicators to provide additional protection to identity theft victims Notifying taxpayers about suspicious activity related to their account and when an indicator has been placed on their account The use of the IP PIN to authenticate affected taxpayers identities to avoid potential processing delays 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 13

14 Work Opportunity Tax Credit VOW to Hire Heroes Act of 2011 Made Changes to the Work Opportunity Tax Credit: Added two new categories of qualified veterans Opens credit to tax-exempt employers Max credit available up to: $9,600 for businesses $6,240 for tax-exempt employers American Taxpayer Relief Act of 2012 ATRA was passed Jan. 2, 2013 It extends the WOTC credit for veterans categories through Dec. 31, 2013, for all employers. It also reinstates other targeted group categories for taxable employers that hire employees in those categories after Jan. 1, 2012, and through Dec. 31,

15 Certification process All employers must obtain certification that an individual is a member of the targeted group before claiming credit Certification process is the same for all employers File Form 8850 with State Workforce Agency Claim Credit: Taxable Businesses Non-refundable tax credit claimed against income tax No change in process for claiming WOTC File Form 8850 Calculate on Form 5884 Claim on Form 3800 Flows through to respective income tax return. (e.g. Form 1040, 1041, 1120 etc.) Claim Credit: Tax-exempt employers Tax credit limited to amount of employer share of social security tax Process for claiming WOTC File Form 8850 File employment tax return (e.g., Form 941) Calculate on and *file Form 5884-C (*separately) Tax-exempt organizations should not reduce required deposits in anticipation of credit 15

16 Additional Information Visit IRS.gov, search keyword WOTC Expanded Work Opportunity Tax Credit Available for Hiring Qualified Veterans FAQs Form 8850 and Instructions Form 5884 and Instructions Form 5884-C and Instructions Notice Notice The Voluntary Classification Settlement Program (VCSP) Ley Mills IRS CSO SL-Field (804) What is VCSP? Voluntary Classification Settlement Program Similar to CSP offered in exams Allows taxpayers to voluntarily reclassify workers as employees for future tax periods Provides partial relief from federal employment taxes 16

17 VCSP Eligibility Eligible taxpayers: Must be currently treating workers as nonemployees Must have consistently treated workers as nonemployees, including having filed 1099s for past 3 years Cannot be under an IRS employment tax audit or worker classification audit by DOL or state agency VCSP Application Process Complete Form 8952, Application for Voluntary Classification Settlement Program File 60 days prior to treating workers as employees IRS reviews application to verify eligibility and contacts the taxpayer to complete the process VCSP Acceptance IRS prepares and sends a closing agreement for taxpayer signature Taxpayer sends full payment with signed closing agreement to IRS IRS sends the finalized closing agreement for taxpayer records 17

18 VCSP Advantages The application and process are simple Taxpayers pay a reduced rate (Section 3509(a)) with no interest and no penalties on this amount Results in just over 1% of amounts paid to workers for the past completed year Audit protection for past years on workers being reclassified Program provides certainty for Federal Employment Tax purposes The Voluntary Classification Settlement Program Temporary Eligibility Expansion (VCSP TEE) Available through 6/30/13 VCSP TEE Eligibility Eligible taxpayers: Must be currently treating workers as nonemployees Must have consistently treated the workers as nonemployees, but did not file all required 1099s Cannot be under an IRS employment tax audit or worker classification audit by DOL or state agency 18

19 VCSP TEE Application Process Complete Form 8952, modified per Announcement File on or before June 30, 2013 IRS reviews to verify eligibility and contacts taxpayer to complete the process VCSP TEE 1099 Requirement Taxpayer must: furnish Forms 1099 to workers electronically file Forms 1099 for workers being reclassified as directed by IRS notify IRS that 1099s were electronically filed VCSP TEE Acceptance IRS prepares and sends a closing agreement for taxpayer signature Taxpayer sends full payment with signed closing agreement to IRS IRS sends the finalized closing agreement for taxpayer records 19

20 VCSP TEE Payment Businesses pay just 25% of tax computed on favorable rates (Section 3509(b)) Results in just over 3% of amounts paid to workers for the past completed year No penalties or interest on this amount VCSP TEE Payment Businesses also pay a reduced, graduated penalty for unfiled 1099s The penalty is capped based on factors in Announcement VCSP TEE Advantages The application and process are simple Taxpayers pay a reduced rate (Section 3509(b)) with no interest and no penalties on this amount Results in just over 3% of amounts paid to workers for the past completed year Audit protection for past years on workers being reclassified Program provides certainty for Federal Employment Tax purposes 20

21 Resources Form 8952 and instructions VCSP pages of IRS.gov, including FAQs Announcement Announcement Online Payment Agreement Ley Mills IRS CSO SL/Field April 2013 Goals of OPA Simplicity and convenience Fewer defaults Fewer posting errors Reduced cost 21

22 Benefits to Taxpayers Fully automated Interactive Streamlined Benefits to Taxpayer No personal contact Taxpayer or Rep Self-Qualifies and applies Education Lower costs Payment Options Full pay in 10-days Short-term extension Monthly payments 22

23 Who Can Use OPA Individuals and Their representatives OPA and Fresh Start Enter into a direct debit installment agreement Convert to direct debit installment agreement Request lien withdrawal Can Use OPA To Revise payment due date Revise payment amount Convert short-term extension to monthly payments Convert regular agreement to payroll deduction or direct debit 23

24 Questions/Other Info IRS.gov key words collection procedures Owe Taxes? New video series IRSVideos.gov/OweTaxes SB/SE Appeals Fast Track Settlement Program Ley Mills IRS CSO-SL-Field April 2013 SB/SE Appeals FTS Alternative Dispute Resolution Program Provides an opportunity for SB/SE taxpayers to expedite case resolution at earliest possible level 24

25 FTS - Background Announcement Announcement Announcement Announcement FTS Expands Nationwide in 2013 The expansion will occur in three stages: Phase 1: adds Atlanta, New York City, Phoenix, and Tampa to current locations effective now Phase 2: adds Detroit and Seattle -effective now, and Phase 3: program goes nationwide by the end of 2013 FTS Success All parties in case participate in FTS session FTS official Trained in mediation techniques Delegated settlement authority 60-day resolution goal 25

26 FTS Offer Time Frames Offered and/or requested prior to the issuance of a 30-day letter by Exam Always prior to issuance of Statutory Notice of Deficiency FTS Procedures Completion/acceptance of Form 14017, Application for Fast Track Settlement FTS session arranged by FTS Official FTS Official facilitates discussions utilizing mediation techniques and settlement authority FTS Eligibility Non-docketed cases Fully-developed cases 26

27 FTS Exclusions TEFRA cases Collection Due Process, Offer in Compromise, and Trust Fund Recovery Penalty cases Whipsaw issues Correspondence cases worked solely at a campus Frivolous issues Uncooperative taxpayers FTS Agreement Reached Parties sign Form FT Session Report agreeing to settlement Report of final agreed issues will be prepared and executed by taxpayer and/or representative Case closed by SB/SE No FTS Agreement Reached Taxpayer retains all appeal rights 30-day letter will be issued Taxpayer will prepare formal protest if required Case sent to Appeals for traditional appeals processing Case assigned to different appeals officer (not the same FTS Official) All information related to FTS session will be expunged from file 27

28 Prohibition of Ex-Parte Communications Does not apply to communications arising in FTS process because Appeals personnel are: facilitating an agreement not acting in their traditional settlement role FTS Benefits Significantly reduces overall IRS experience Reduced interest costs Fewer IRS contacts Lower representation fees Prompt resolution FTS Benefits for Tax Professional High satisfaction rate with the program and outcomes (according to survey results) Faster resolution time Face-to-face meeting with all parties Still retains full appeal rights if no agreement reached 28

29 Visit IRS.gov Search Keyword Alternative Dispute Resolution. Watch the FTS Process video for an overview. Contact information Name Ley Mills Phone Number Address 29