Identity theft is the theft of a person’s identifying information to commit fraud or other offenses. Tax-related identity theft is generally related to tax refunds, the Earned Income Credit, or employment. Scammers often file false tax returns using stolen information. Undocumented workers may use a stolen Social Security number to apply for employment; their income is then attributed to the victim of the identity theft. The reporting of the identity thief’s income to the victim’s Social Security number can cause the victim to lose Social Security, public housing, and other public assistance. Tax-related identity theft may also cause the victim to have a host of consumer problems such as damage to a credit rating, denial of housing due to poor credit, and suits by creditors for money the victim never borrowed.1 Advise clients who suspect identity theft to review their annual free credit report to see if any false accounts have been opened in their names.2 Such false accounts can be disputed with the credit reporting agency.
The IRS processes identify theft and return preparer fraud differently. Identity theft involves a third party using a taxpayer’s identity to obtain a refund. “Return preparer fraud” is when the taxpayer’s preparer places false information on a return or uses a routing number to misappropriate the taxpayer’s direct deposit refund. To facilitate resolution of your client’s problem, be sure to file the proper form. Use Form 1409, Identity Theft Affidavit, for identity theft and Form 14157, Complaint: Tax Return Preparer, for return preparer fraud or embezzlement.
When submitting an Identity Theft Affidavit, the taxpayer will need to provide proof of identity such as copies of Social Security cards and picture IDs. If the taxpayer has any information about the person who may have stolen the information, this should be relayed to the IRS. If the account transcript shows that a false return was filed from an unknown address, the taxpayer can provide proof of the taxpayer’s actual residence that year, such as a lease or ID. If the account transcript shows that a large refund was deposited, the taxpayer may want to provide bank records from the same period showing that the refund was never deposited in the taxpayer’s account. The taxpayer may also want to file a police report about the identity theft and provide proof of that report. The end result should be that the IRS will waive any liability resulting from the falsely filed return.
In the case of tax preparer fraud, give the IRS as much information about the tax preparer as possible when submitting a complaint. An internet search of the preparer’s name may provide addresses and phone numbers. You may also find information about previous arrests or even convictions for tax fraud! The IRS will not provide information about its investigation or any actions taken against the preparer, but you will be helping to prevent other taxpayers from becoming victims. The filing of this complaint will also bolster your arguments that the taxpayer should not be responsible for any liability resulting from the falsely prepared return.
Lastly, don’t forget to list the tax preparer or alleged identity thief as an adverse party in your client records. It’s possible they will come to you for assistance when investigated by the IRS!