Identity theft is a growing problem nationwide and its effect on victims can be devastating. Identity thieves often use a stolen identity to open accounts, including credit cards and utility accounts, to ruin one’s credit history. On occasion, identity thieves do not stop there. They may also use their victim’s tax-related information, causing significant problems when filing tax returns.
Taxpayers need to be aware of three types of identity theft:
- An identity thief may steal the taxpayer’s identity and use the victim’s social security number to file a false tax return. Often, this can include a return claiming a refund that is not owed;
- An illegal worker may use the taxpayer’s social security number, which results in additional income being reported to the IRS and charged to the taxpayer; and,
- A company may use an individual’s social security number and report earned income to the victim, even though the victim may have never worked for the company. By doing this, the company intentionally falsifies its reporting to reduce its tax¬able income and tax liability.
All three of types of identity theft can wreak havoc for taxpayers.
Discovering and Reacting to Theft
Typically, there is a delay between the time that a taxpayer’s identity is stolen and the time he/she becomes aware of the theft. The delay in first learning of the theft is often attributable because identity thieves may change the mailing address of the taxpayer without his/her knowledge. When the compromised return is filed, the IRS updates its records with the “new address” and any further IRS notices are sent to the fictitious address. At this point, all communications from the IRS are redirected to the address of the identity thief.
The taxpayer typically finds out about this type of fraud after he/she files his/her tax return and it is either rejected or the anticipated refund never arrives. To rectify the situation, the taxpayer will have to provide documentation to the IRS to demonstrate that he/she is in fact the owner of the stolen social security number (“Identity Confirmation Information”)1. By providing the Identity Confirmation Information to the IRS the taxpayer has officially proven his/her identity and the taxpayer’s account will then be coded in an effort to eliminate future episodes of identity theft.
Frequently, the victim does not receive any notice of fraud because the IRS does not recognize that fraud has occurred. In some circumstances, a taxpayer may not learn of fraudulent activity until after collection activity has commenced. When this occurs, it is incumbent upon the taxpayer to immediately contact the IRS in an effort to protect his funds prior to having them seized.
In some circumstances, the IRS will recognize that a taxpayer’s social security number has been compromised. In those circumstances, the IRS will request the same documentation listed above (in footnote one). If the taxpayer does not provide the information in a timely manner, his social security number will be frozen and the IRS will issue a taxpayer identification number until the matter is resolved.
When a taxpayer’s social security number has been stolen and used for work purposes, the taxpayer will receive notice from the IRS that he needs to file a tax return or that his tax return has been changed by the Service. In responding to the IRS, the taxpayer will have to prove that he did not have income equal to the total amount reported. Typically, one can demonstrate his total earnings by obtaining corroborating information from his employer or by confirming that he did not live in or near the location from which the incorrect income was reported.
It is imperative that the taxpayer comply with the IRS’ requests to ensure that an assessment is not entered and collection activity does not occur. If collection activity has commenced, the taxpayer should follow regular avenues for disputing the tax assessed. The taxpayer can use the Offer in Compromise Program, ask for Audit Reconsideration, or go through the other necessary channels to have the case heard in the United States Tax Court. Should the case be heard in the Tax Court, the burden of proof, usually on the taxpayer, shifts to the Service.
With identity theft escalating, the IRS has established a unit specifically designed to address these sorts of issues. The new unit is the IRS Protection Specialized Unit (the “Unit”), which may be reached at the Identity Theft Hotline 1-800-908-4490. If the taxpayer is unable to work with the Unit, or the Unit is not properly handling the matter, he/she may turn to the Taxpayer Advocate Service (“Advocate”) at 1-877-777-4778. The taxpayer should only turn to the Advocate’s office for assistance if the Service has not properly resolved the matter. The Advocate’s office will assign the claim to a case worker.
Until the Service has knowledge of identity theft activity, there is nothing it can or will do to an individual’s account. Action will only occur after the taxpayer’s account is actually compromised. To minimize damage, taxpayers can and should be proactive. To begin, he/she can monitor use of his/her social security number by ordering a free credit report each year and checking for unauthorized activity. Taxpayers should also zealously guard their social security number and not readily share it except when absolutely necessary.