Tax Identity Theft and the IRS IP PIN

Tax ID Theft

It has been become very common to hear news about identity theft where confidential information is being stolen and used to steal a person’s money by taking over the identity of that person. Most often the start of that process begins when sensitive data is stolen by a data breach. There are many forms of identity theft. For tax purposes, this occurs when a person or entity obtains your social security number (SSN),and uses that SSN number to file a tax return to claim a fraudulent refund claim. Unfortunately, this has been happening on a regular basis with both the IRS and New York State Tax ID Theft.

You may not know that your identity has been stolen for many months after the tax return is filed, and often you only find out when you attempt to file your real return and are told by the IRS that a return was already filed or the income tax return that was filed looks suspicious.

The thieves are very clever. In the past, they would setup fake bank accounts to receive the refund monies. As they have become more sophisticated, they often use your real bank account information, and then they contact you acting that they are from the IRS and telling you that they made a mistake, and to return the money (to a fake account). The phone calls from the thieves are very authentic, so many people are falling victim to this scam. There are typically three types of ID theft that will or could affect your tax situation A) when a tax return is filed that uses your dependent on their return, B) when a tax return is filed with false information and the fraudster receives a tax refund and the IRS or State thinks you personally received it, and C) an account is opened, such as a credit card, and for future protection you want to protect yourself.

With the recent Equifax Credit Bureau identity theft event, and many prior episodes of personal identifying information being stolen (Yahoo, etc) that appears to happening all the time now, I thought an article would be helpful on how your tax returns are affected by such events, and concrete steps you can take to protect yourself against IRS identity theft (and your parents if they are elderly).

From my experience as a CPA and Tax Attorney, if you think you are completely protected from identity theft issues by hiring a credit monitoring company, you are partially incorrect. The value of these companies is that they alert you if someone has stolen your identity and used (or try to use) this information to obtain credit. The problem is that often that the notification of this is after the crime has occurred, and you still have to deal with the clean-up. You may be better off pulling your own credit report every four months (from the three free ones you get every year) and doing this work along with a credit monitoring company just to make sure its done correctly. This is also a good way to make sure that your credit information is generally correct, and you can dispute any incorrect items through the credit companies.

From a tax perspective, the “bad guys” are using your social security number and other identifying information  to get tax refunds. They do this by filing false income tax returns with your information, and typically having the refund directly deposited into a foreign bank account they control. When this happens (per the IRS 14,000 times it was done in 2016), you typically only find out when you file your legitimate income tax return, and are told by the IRS that a tax return has already been filed, and a refund already issued. The IRS will not go after you for the false refund, but this creates a huge mess that you will be dealing with for 1-2 years. Well, the question is, how do you avoid such a mess? The IRS has a program where you can request a PIN that they would send you, and you would use when you file your income tax returns. The “bad guys” would not have this PIN, so they would be blocked from filing a false tax return. As with most IRS related matters it is not easy to get a PIN (hopefully this will change someday). To obtain a PIN, you need to file Form 14039 (Identity theft Affidavit) with the IRS, and request one. When you file this form, the IRS will also mark your account as having a higher risk of fraud, and keep an eye on it for you. In addition, you should also obtain and examine your IRS tax account transcripts and review the activity for filed tax returns and refunds. I would take this step every six months. Therefore, with the PIN filing method, and reviewing your account at the IRS twice a year, you should feel confident that you have this issue under control with them.

If you think that fraud has occurred, do not pick up the phone and call the IRS. Please go in person to the local IRS office with your birth certificate, two picture ID’s, and copies of your tax returns for the last three years to prove who you are, and to explain what happened.

It is wise to protect yourself by being aware of the warning signs that there may be trouble. Be aware of the tax notices that the IRS issues, since they may offer clues that an issue exists. If you are sent a IRS tax notice that your refund was offset against another tax liability, that is a signal that a return was filed and you should contact the IRS. The other common clue is that that the IRS notifies you that a tax return was filed that had wages that were not yours.

When the IRS flags your return for an ID theft issue, and stops the processing function, they will notify you with 1. A 5071C letter, that asks for you to use an online tool to verify the return, 2. A 4883C letter, that has the taxpayer call the IRS and be ready to verify the return (typically having your tax documents at hand), or 3. A 5747C letter, for data breach victims to also verify their return with past tax data (W2 forms, Form 1099, etc.).

There are a few steps you can take once you think you are a victim of identity theft of your SSN. You can place a fraud alert with the three credit bureaus which will help stop further damage. The next step would be to close any bank accounts created by the identity thieves, and try to lower your number of bank accounts as much as possible to be able to better monitor them. If they used your social security number, respond to the notices the IRS sent, and call the IRS to put them on notice of the overall issue. You will then complete a form 14039, which is the identity theft affidavit. You then attach that affidavit form to your actual income tax return and mail it to the IRS. Each state also has a similar form and procedures. You should also pay any taxes you owe (not the fraudulent numbers), and file all your income tax returns on time. It is very important to stay on top of the IRS about this issue. If you feel after a few months that adequate progress is not being made, they have a specialized group that handles identity theft matters and there phone number is 1-800-908-4490.

Solution: IRS IP PIN

With the ID risks explained above, we encourage all taxpayers to obtain an IRS IP PIN. With identity theft occurring more frequently, use the Internal Revenue Service IP PIN service to get an identity theft PIN to protect yourself. With an IRS IP PIN, you can protect yourself from fraudulent use of your Social Security number on a tax return filed with the IRS or New York State Tax Department. If you receive a Notice CP01A from the IRS you need to obtain an IRS IP PIN

The IP PIN is a six-digit number that you obtain after you have applied for an PIN number through your IRS online account. It helps prevent misuse of your SSN on a fraudulently filed tax return. You must enter your IP PIN on your federal income tax before it can be e-filed.

It’s easy for identity thieves to commit refund fraud using someone else’s name and Social Security number, especially if that person does not file a tax return. Every person on income tax return should attempt to get a PIN number, but it’s likely much more difficult for tax dependents since they tend to be children and for them it is hard to get their identities verified.

Here is a list of frequently asked questions related to the program: Frequently Asked Questions about the Identity Protection Personal Identification Number (IP PIN) | Internal Revenue Service (irs.gov).

Details about the program:

1. The PIN is valid for 1 year.

2. Each year a new PIN is generated.

3. Use the IRS IP PIN for your Form 1040 tax filings (returns on time and unfiled delinquent tax returns).

4. The PIN number gets inputted into the tax software when you file the return.

5. Do not share your PIN with anyone other than your tax preparer or trusted person.

6. You can retrieve a lost IRS IP PIN here. If that does not work call the IRS at 800-908-4490.

The Get IP PIN at the IRS is scheduled to launch each year in January. The Pin is valid for one year. The website is Get An Identity Protection PIN | Internal Revenue Service (irs.gov).