The numbers on identity theft, particularly tax related ID theft, are alarming. The IRS issued $5.8 billion in fraudulent refunds in 2014, it can take 44 months for a victim to fully restore his or her identity and there are 19 new victims in the United States every minute, according to AICPA Senior Technical Manager Melanie Lauridsen, citing numbers from the U.S. Government Accountability Office, the U.S. Postal Inspection Service and the credit bureau Transunion, respectively.
Lauridsen, along with other members of the AICPA Tax Advocacy Team, discussed in a special Aug. 5 Washington Tax Brief what changes the American Institute of CPAs (AICPA) is championing to prevent ID theft from occurring and how to improve the process for dealing with it. (To watch the webcast, click here.)
Among the changes are:
Greater Access to Identity Protection Personal Identification Numbers (IP PIN) – A key change the AICPA has been pushing for several years is allowing any taxpayer who wants an IP PIN to get one. AICPA Tax Advocacy Director Melissa Labant noted that while the IRS considers this change to be too costly, the cost should be weighed against the price of identity theft that could be prevented.
Accelerated Due Date for Information Returns such as W-2 and 1099s Forms – Extensions of broker deadlines result in delayed or corrected information returns, which create a difficult filing season for practitioners. This past year there was a particular problem with the IRS granting brokers extensions to file 1099s. The AICPA is concerned with a single deadline for information returns and recommends instead that information returns be due to the IRS two weeks after the filing deadline to a taxpayer.
Single Point of Contact at the IRS for ID Theft Victims – Under the current system, the IRS has concentrated its ID theft resources under one department, the Wage and Investment Division, but a taxpayer calling to get help may find himself transferred from one person to another, as many as eight times.
Truncated Social Security Numbers – While it may be ideal to have truncated numbers on all forms, the IRS system cannot accept truncated numbers, Lauridsen noted. Therefore, the AICPA recommends using truncated Social Security numbers on forms not filed with the IRS and on charitable contribution acknowledgement letters to the donor.
Higher De Minimis Threshold ($50) for 1099 and Other Information Returns – Not only would this help with preparers’ workload compression by eliminating amendments for small amounts, but also it would help prevent identity theft by allowing brokers to provide 1099s more quickly and efficiently. Some taxpayers refuse to file their return early simply because they know they will receive a corrected 1099 for a few dollars.
Stiffer Penalties for Filing a Return Using a Stolen Identity – Making it a felony under the tax code and increasing the penalty to $250,000 ($500,000 for corporations) is highly controversial, Lauridsen said, with strongly differing opinions on both sides. Some believe that there are enough penalties to punish wrongdoers, while victims and others want even stronger penalties.
Other AICPA-backed proposals include granting the IRS limited access to the Department of Health and Human Services’ National Directory of New Hires in order to identify and prevent fraudulent filings, expanding online availability of 1099s and W-2s, and adding a scannable code to paper returns.
Ideas under Consideration
In addition to the initiatives that have been publicly voiced to policy makers, the AICPA, including its volunteer panels, are exploring more alternatives, albeit some that the team acknowledges would not be terribly popular, such as delaying refunds until the IRS has time to match information from W-2s and other sources with the tax return.
Also in the brainstorming mix is a proposal to get information to IRS faster by requiring mandatory e-filing of W-2s and other information returns. This would allow the IRS to access the information more quickly in order to match information on returns more efficiently.
The IRS has launched pilot programs to test new ideas for preventing ID theft and is preparing to introduce more. For example, to make it more difficult to file a false return using someone’s payroll information, the IRS will assign a code to a limited number of W-2s that the practitioner will use when entering the W-2 information for filing a return. The IRS would then be able to verify that the information was entered by the legitimate taxpayer who has a W-2, instead of fabricated W-2 information created by an identity thief.