Assisting clients with tax-related identity theft.

• Author: Primrose, Jennifer

Identity theft is a growing problem, and tax-related identity theft in particular continues to increase each year. In 2015, tax-related identity theft continued to hold a high spot on the IRS's annual "Dirty Dozen" tax scams list. According to the U.S. Government Accountability Office, fraudulent refunds paid in 2013 totaled $5.8 billion (see GAO Rep't No. 15-119). CPAs and tax preparers can play a vital role in assisting both individual and business clients who have become identity theft victims, and they can also recommend preventive measures to help their clients lessen the risk of identity theft.

What Is Tax Return Identity Theft?

Tax return identity theft occurs when the taxpayer's personal information, such as name, Social Security number (SSN), employer identification number, or other identifying information, is used without the taxpayer's authority to file a fraudulent tax return (usually to claim a fraudulent refund or to obtain tax benefits). This type of identity theft carries serious consequences. It can take victims months just to prove their identity to the IRS, which in turn delays the processing of legitimate refund claims. According to the IRS, individual victims of identity theft "may lose job opportunities, be refused loans, education, housing or transportation, and may even be arrested for crimes they didn't commit" (IRS Publication 4535, Identity Theft Prevention and Victim Assistance). Business clients may incur significant damage to their reputations, in addition to financial losses and the costs incurred to resolve the issues with numerous agencies.

Individual Taxpayer Detection: Most Common Warning Signs Tax Practitioners Will Encounter

When a client's SSN has been compromised, he or she may experience the following:

* The return is rejected, usually with an IRS reject code that indicates the taxpayer's SSN already has been used.

* The client receives a notice from the IRS requesting additional information to process the return accurately or an adjusted refund notice with changes to the Form 1040, U.S. Individual Income Tax Return, when the taxpayer has not actually filed the return.

Business Taxpayer Detection: Most Common Warning Signs Tax Practitioners Will Encounter

Business identity theft may be more difficult to detect than individual identity theft, as the signs that indicate business identity theft may also be the product of a simple processing or filing error. The following are signs that warrant additional investigation:

* The client files an original tax return for a particular tax year, but it is accepted as an amended return;

* The IRS issues a notice to the client regarding fictitious employees; or

* The client discovers activity related to a business that is inactive or that has already been closed, after all account balances pertaining to that entity have already been paid.

How Can Tax Practitioners Make This Process Less Stressful for Clients?

For individual identity theft, in order to be able to deal directly with the IRS on a client's behalf, the tax practitioner should file IRS Form...