Tax simplification: key to fighting tax return identity theft.

• Author: Lauridsen, Melanie

Identity theft and tax simplification are high priorities for members of Congress, the IRS, and all taxpayers. All people are concerned about identity theft and how it affects them. According to a CNN Money report, 40 million people had their credit/debit card information stolen during the 2013 Christmas shopping season through a security breach at Target (see Wallace, "Target Credit Card Hack: The Latest," CNN Money (Dec. 27, 2013), available at tinyurl.com/mbcy4pn). In addition, people are aware of the complexity of the Code, and the majority of the population seeks assistance from tax preparers to file their returns. Though most people think the issues are unrelated, one potential way to decrease identity theft and prepaxer fraud is tax simplification.

Tax return identity theft and return preparation fraud are as rampant as ever and take various forms:

* An identity thief steals a taxpayer's Social Security number (SSN) and files a false return with it before the taxpayer files. The identity thief receives the refund unquestioned, since the thief's return is the first one filed with that SSN.

* An identity thief steals a deceased taxpayer's SSN and files a false return claiming a refund. Often, this can go on for years since no other person is filing a tax return under that SSN.

* A deceitful tax preparer promises large, attractive refunds where his or her commission is based on the refund. The taxpayer does not understand that the preparer is claiming false deductions such as, for example, extraordinary job expenses or that the taxpayer has five children instead of two. The taxpayer pays the return preparation fees and receives the large refund. Eventually, the IRS sends a notice requesting a return of the incorrect refund amount.

* An unscrupulous tax preparer alters a taxpayer's return, requesting a larger refund, after the taxpayer has signed the return. The preparer pockets the inflated portion of the refund, while the unsuspecting taxpayer receives the correct refund. Eventually, the IRS sends a notice requesting repayment for the misstatements on the tax return.

In response to a tax reform draft proposal by former Sen. Max Baucus, the former chairman of the Senate Finance Committee, the AICPA provided a comment letter on tax simplification measures that can help reduce identity theft. (Baucus's proposal is available at tinyurl.com/pzuq7fb. The AICPA's comments are available at tinyurl.com/m6jmqap.) The proposal would provide...