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Federal agencies strive to counter identity theft

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There are always plenty of reasons to speed up the process of filing your individual return.

The primary reason has always been that, if you’re expecting a refund, you shouldn’t wait any longer than necessary to receive it.

Well, you can add identity theft to your reasoning now.

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Identity thieves have found ways to fraudulently prepare tax returns and steal refunds from taxpayers, and they’re doing it at exponential rates. Many times, these stolen numbers have been those of deceased individuals, children or those not otherwise required to file tax returns. However, anyone can be targeted.

Many families have suffered the passing of a loved one only to find that the decedent’s tax refund was stolen by identity thieves. Ironically, much of the information used by identity thieves is received from the federal government.

Every year the Social Security Administration releases the names and Social Security numbers of individuals when it learns of their deaths in a Death Master File. The file is meant to be confidential, but it has proven to be easily accessible. In a 2012 letter to the Office of Management and Budget, Senator Bob Casey (D-PA) called on the administration to finalize rules that would bolster privacy protections and better protect Americans’ Social Security numbers.

The method of delivery of the fraudulent refunds also facilitates the theft. Direct deposit and debit cards are often used by identity thieves.

Unfortunately, the Internal Revenue Service was found not to be in compliance with direct deposit regulations that require tax refunds to be deposited to an account only in the name of the individual listed on the tax return. In just one case, there were 590 direct deposits to the same bank account totaling over $900,000.

In July of this year, the Treasury Inspector General for Tax Administration (TIGTA) issued an audit report on this subject. The agency was established in 1999 to provide independent oversight of IRS activities.

While the problem of identity theft and fraudulent tax returns has been around for a while, it seems to have exploded for the tax years 2010 and 2011, and it looks like 2012 may be even worse. Florida has been an epicenter, where gang activity actually declined in some areas during January and February because the thugs found fraudulent tax return filing more profitable than drug deals.

In analyzing 2010 tax returns filed in 2011, the most recent TIGTA report found that the IRS may have delivered more than $5 billion in fraudulent refunds in addition to what it had already detected.

During the 2011 filing season, the IRS reported that it prevented $6.5 billion in fraudulent returns (938,664 tax returns). Even more troubling, the TIGTA report estimates that the IRS could issue approximately $21 billion in fraudulent tax refunds over the next five years.

The IRS disagrees with this determination. It believes the filters it recently added to prevent some of this fraud were not taken into consideration in the estimate.

There are several problems contributing to this situation. For one, the IRS allows refunds to be issued before matching data used to verify the numbers are submitted.

For example, someone could file a tax return requesting a refund on Jan. 16, while the wages and related federal income tax withholding shown on that tax return are not reportable to the IRS on a W-2 form until Jan. 31.

Another problem is the level of the refund. Even if a filter is in place to flag a return as potentially fraudulent, a refund that is small enough often gets through. The IRS simply does not have enough resources to investigate all of these occurrences.

Any tax refund that is stolen from a taxpayer will ultimately be refunded to a taxpayer once the IRS is convinced of a taxpayer’s identity. But this can be a long and arduous process.

The better news is that the IRS has recently issued Form 14039, which is available to taxpayers who have been or may be victims of identity theft. The form essentially puts the IRS on notice of a taxpayer’s identity (or a decedent’s if the taxpayer is an executor).

After a taxpayer files Form 14039, the IRS will not send refunds, etc., to the addresses of others claiming the same identity. The form is filed with appropriate photocopies of identification.

To lessen the chance of stolen refunds, the following actions are recommended:

  • File individual returns, especially those with large anticipated refunds, as soon as practicable.
  • Don’t ignore an IRS notice that indicates you’ve received wages from a job you’ve never held.
  • File Form 14039 if you have been an actual victim of identity theft.
  • File Form 14039 if you feel you are a potential victim of identity theft, e.g., if you’ve had a lost or stolen purse or wallet or questionable credit card activity.
  • File Form 14039 if you’re the executor for a decedent with a potential refund, and recommend that this action be taken for friends and loved ones who have recently died.

If taxpayers fall victim to identity theft, they may feel that their IRS information is safe and refunds are not at risk. And if taxpayers don’t feel the need to share identity theft issues with their accountants, opportunities to protect refunds may be missed.

In addition to helping identity theft victims clear up problems with their IRS accounts, the IRS works proactively to help ensure that these taxpayers do not encounter delays in processing their future returns.

In January 2011, the IRS launched a pilot program for Identity Protection Personal Identification Numbers (IP PIN). The IP PIN is a unique identifier establishing that a particular taxpayer is the rightful filer of the return. This program continues to be in place.

There has been a 200 percent increase in ID theft phone calls, reported Peggy Bogadi, the commissioner of the IRS Wage and Investment Division, at the November 2012 National Tax Conference of the American Institute of CPAs in Washington. She also said that the IRS will issue more than 600,000 IP PINs for filing 2012 returns.

In December 2012, the IRS will mail IP PINs to ID theft victims to be used in filing their 2012 tax returns. The IRS provides answers to some frequently asked questions about IP PINs on its website at www.irs.gov/individuals/article/0,,id=249368,00.html.

Taxpayers who use these IP PINs when filing their 2012 returns should not have any processing issues. If anyone tries to file a tax return without the IP PIN, the refund will not be issued without further investigation, according to Bogadi.

For those who receive an IP PIN, it’s critical that they put it in a safe place so they will have it for their tax return preparation.

All victims of identity theft should let their tax advisers know as soon as possible.