When something goes wrong, people euphemistically say, “At least you have your health.” The AICPA wants to change that to: “At least you have your identity.”
The Institute is hearing from more and more members with tax-related identity theft stories that make this author’s toes curl. One member recently told about how his client sent him an IRS notice the client had received during the third week of April. The notice indicated the amount of the refund shown on the client’s Form 1040 was being adjusted upward because the return showed only the amount of W-2 withholding but failed to claim the quarterly estimated tax payments that had been made. Normally, that would be great news and government efficiency at its best; however, there was a problem. The CPA had actually filed an extension for the client on April 15. And no, the client had not filed the return, so the reader should know where this story is going.
Tax-related identity theft has become a huge and growing problem in this country. The IRS Advisory Council (IRSAC) serves as an advisory body to the IRS commissioner. IRSAC’s purpose is to provide an organized public forum for IRS officials and representatives of the public to discuss relevant tax administration issues. In its 2012 Public Report, IRSAC indicated that from 2008 through the middle of 2012, the IRS had identified more than 600,000 taxpayers who had been affected by identity theft. With respect to these taxpayers, during 2011 the IRS prevented $1.4 billion in refunds from being erroneously sent to identity thieves. Through mid-April 2012, the IRS had stopped more than 325,000 questionable returns with $1.75 billion in claimed refunds by using filters specifically targeting refund fraud.
Despite the IRS’s successes in combating identity theft, it is hard to overemphasize the staggering dimensions of the tax identity theft problem. According to the National Taxpayer Advocate’s 2012 Annual Report to Congress, identity theft cases handled by the IRS grew exponentially in fiscal year 2012 over the prior year. The IRS’s Identity Protection Specialized Unit (IPSU) received about 450,000 cases in FY 2012, a 78% increase over FY 2011. Moreover, the report revealed that identity theft cases amounted to 25% of all cases the Taxpayer Advocate Service received in FY 2012.
Indeed, IRSAC’s first recommendation in its 2012 report said,
The IRS must continue to diligently look for ways to combat identity theft which leads to tax fraud. The IRSAC commends the IRS on its two-pronged effort, but is concerned that both taxpayers and the tax system will suffer if appropriate measures are not taken quickly and effectively to control this fraud.
The AICPA’s involvement is growing, and it is critical for the Institute to play a thoughtful and forceful role with regard to identity theft, an issue that could have a profound impact on tax administration. In April, Jeffrey Porter, chair of the AICPA Tax Executive Committee, testified at a Senate Finance Committee hearing covering filing season, tax reform, and identity theft. A few weeks later, Porter participated in an IRS Oversight Board public forum panel on “Working Together to Combat Fraud,” which looked in depth at ways to improve the federal government’s response to tax-related identity theft.
The AICPA also reviewed S. 676, Identity Theft and Tax Fraud Prevention Act of 2013, as introduced by Sen. Bill Nelson, D-Fla., and provided its initial thoughts on various provisions of the bill in a June 27 letter to Nelson and the chairman and ranking minority member of the Senate Finance Committee. As the Institute continues to review the bill in detail, it may provide additional written feedback; however, the AICPA applauds and supports the majority of the bill’s provisions.
It is clear in both the AICPA’s presentations and reviews of S. 676 that everyone needs to play a role in solving the problems: Congress with needed legislative changes; the IRS in how it administers the laws; and CPAs in how they manage their practices. Here are some ideas to consider:
The AICPA strongly believes more extensive legislation is needed to allow truncated Social Security numbers (SSN) to be used on all types of tax forms and returns provided to a taxpayer, employee, or other recipient, including a broader array of Forms 1099 and even W-2s. The Institute also supports civil penalties for tax-related identity theft, including on fraudulent tax preparers. Another suggestion, which the Institute believes would enhance identity protection, is congressional passage of legislation clarifying public access to the Death Master File, a database that provides the SSN and other personal information about a deceased person.
For the IRS
Assuming the appropriate allocation and receipt of resources, the IRS can take a number of steps to further mitigate the problems surrounding identity theft. The IRS should continue to increase staffing dedicated to identity theft cases and improve its training of agency employees to ensure the proper response and assistance for identity theft victims. The IRS can do more with regard to administratively implementing SSN truncation; prioritizing the establishment of one point of contact within the IRS for prompt resolution of identity theft cases; and making broader use of identity theft personal identification numbers (IT PINs).
With regard to resources, the AICPA has long advocated IRS funding levels that would allow the Service to efficiently and effectively administer the tax laws and collect taxes. Giving the IRS the resources it needs to properly process tax returns and enforce the tax laws is vital to maintaining a voluntary compliance tax system. The Institute expects the IRS to identify responsible ways to allocate any additional resources it receives and Congress, through its oversight responsibilities, to ensure that those resources are properly used.
As trusted advisers, CPA tax return preparers can inform their clients what to do if they receive an email or other communication that looks suspicious. They can remind clients that (1) the IRS never uses email or social media to contact taxpayers directly; and (2) the IRS provides numerous ways for taxpayers to identify possible ID theft and telephone numbers to report it. CPAs and other tax professionals can also implement a number of steps to mitigate the potential for identity theft by streamlining their office procedures.
The AICPA looks forward to working closely with Congress, the IRS, the IRS Oversight Board, and Institute members on ways to combat tax fraud and promote good tax administration for the benefit of American taxpayers. Additional information and resources are available at the AICPA’s Identity Theft Information and Tools webpage. Here’s wishing you good health and safe identity.
Edward Karl is AICPA vice president–Taxation in Washington, D.C. For more information about this column, contact Mr. Karl at email@example.com.