Identity Theft and Tax Refund Fraud

By William Delaney, EA
Westwood, Massachusetts

Is this a solution or does it add to the problem?

A proposal currently scheduled for hearing by the U.S. Senate Finance Committee
described as a “Bill to Prevent Identity Theft and Tax Refund Fraud” includes a major provision which would mandate the regulation of all presently unregulated paid tax return preparers by reestablishing the Registered Tax Return Preparer status.  Aside from that, the proposal has a number of provisions which are actually suggestive of its’ title.

Improper use of information by preparers of returns.  The penalty for “unauthorized disclosure or use of information by tax return preparers” is increased from $250 to $1,000 per incident.  The criminal penalty for knowing or reckless conduct would be increased to $100,000 “in the case of disclosures or uses in connection with taxpayer identity theft.”

Require the IRS to study the feasibility of blocking electronically-filed tax returns.  This would be a process whereby a taxpayer who has filed an “identity theft affidavit” and been properly identified, may elect to block a tax return or returns filed either by that taxpayer or by someone purporting to be that taxpayer.  Question:  How would the IRS be able to tell the difference?  This blocking would have to be in place prior to a filing.  Perhaps it has to do with the presence or absence of a taxpayer PIN (see following)?

Enhancements to the IRS PIN program.  Expands the program (6-digit identifier which authenticates a return filer as the legitimate taxpayer) to require the IRS “…to issue an IP PIN to any individual requesting protection from identity theft-related tax fraud…”  This proposal would be effective on a nation-wide basis by July 1, 2018.

Increase electronic filing of returns.  Individual tax return preparers would be required to file all individual returns electronically effective for returns with a due date (without extension) after December 31, 2016.  A waiver would be possible for return preparers whose business is operated in a geographic location which has “technological constraints such as lack of internet availability.”

Information returns regarding wages paid employees.  “The proposal accelerates the filing of Forms W-2 and W-3, and Forms 1099-MISC…”  The due date for providing copies to recipients would still be January 31, but the employer (whether paper filed or electronically filed) due date would be 15 days later (i.e. Feb. 15th).  At present, the electronically filed due date is March 31.  Effective for calendar years beginning after December 31, 2015.

Taxpayer notification of suspected identity theft.  If there may have been unauthorized use of a taxpayer’s identity or that of a dependent, the secretary shall (as soon as practicable) “notify the taxpayer of such determination…”  “In addition, the Secretary shall disclose to the taxpayer (or such person’s designee) whether an investigation has been initiated, is open or is closed…As under present law, the Secretary is not obliged to disclose return information the disclosure of which would seriously impair Federal tax administration.”

One cannot help but wonder just what can or will be disclosed under such a provision which the taxpayer does not know under “present law,” which is often very little.  This is really a negative reaction to N. H. Senator Kelly Ayottee’s recent initiative whereby the IRS Commissioner agreed to look into providing a copy to the taxpayer of a fraudulently filed return using that taxpayer’s and/or dependent’s identity information.  It appears to your Editor that the government is having second thoughts about letting us know what they know…privacy and all, don’t you know!