The IRS and Combating Identity Theft

ID theft

UPDATED:  November 6, 2017 – Identity theft affects an estimated 9 million Americans each year, and the IRS is making it a top priority to stop.  The IRS increased efforts to help victims and continues to investigate and close new cases daily.

The Federal Fair and Accurate Credit Transactions Act of 2003 was passed to provide new tools to consumers, companies, regulators, and reporting agencies to fight identity theft.  In 2015, the Senate introduced the Identity Theft and Tax Fraud Prevention Act to make several changes to policies and procedures. Identity theft is a problem to everyone, and there are ways you can protect yourself.

Tax-Refund Fraud

Tax refund fraud has skyrocketed.  In 2013, the loss to identity theft was reported to be $6.5 billion.  The estimate for 2016 is $21 billion.  There are a few reasons why this has been so difficult to stop.  First, criminals need so little information to file a fraudulent tax return.  They need your name, birthdate, and Social Security number to file false W-2’s and collect a tax refund check.

The IRS is using outdated software, and with strict budget controls, the fraud detection software they are using is in dire need of upgrades.  The IRS begins paying out tax refunds on January 1 and doesn’t receive accurate employment information from companies until around March.  The IRS is not completely without ways to flag returns for fraud.  They watch for returns going to the same address or bank accounts and help set past victims set-up an identity protection number for future tax returns.

Ways to Protect You Identity

There are things you can do to protect your identity.  You can subscribe to an anti-identity theft service, but this is not a failsafe.  Do not throw out paperwork that contains your name, birthdate, Social Security number, or other valuable personal information.  Shred documents before disposing of them.  Remove your name from promotional lists, so you will not receive pre-approved credit card offers.  Monitor your bank and credit card accounts for activity you do not recognize.

Never give personal information over the phone or by email unless you are certain whom you are talking to.  The person may have your name and address, and ask for verification of your birthdate and Social Security number.  The person may say they are from the IRS and threaten legal action or a promise of money.  Remember, the IRS communicates important things through the mail and if they do call, they have your information.  You can verify by them giving you all your information.

Identity Theft and Tax Fraud Prevention Act

This Act requires the Department of the Treasury to make several changes.  For example, a requirement to reduce the time necessary to manage cases of tax-related identity theft in connection with fraudulent tax returns to 90 days.  To make sure those affected by identity theft have a single point of contact with the IRS, are issued a personal identification number for protection, and notify a taxpayer if there has been unauthorized use of their information.

It amends the Public Health Service Act to require the Health Information Technology Committee to devise a plan to use information outside of a Social Security number to coordinate benefits and billing.  It directs the Department of Health and Human Services to make changes to prevent Medicare fraud and amends the federal criminal code to prohibit the display, sale, or purchase of Social Security numbers without consent from the owner.

The Act amends the IRS code to impose criminal penalties for income tax fraud and allows the use of a personal identification number outside of a person’s Social Security number for security on W-2 forms and income tax paperwork.  It will also impose a fine on tax preparers who fail to verify the person’s identity when filing a tax return or to claim a return.  It authorizes the IRS Commissioner to transfer funds for the purpose of prevention and resolution of possible cases of tax fraud.  You can find out more details in the S.676 Summary.

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