Tax-Related Identity Theft and Scams: Are Your Defenses Strong?
By Michael A. Gillen and Steven M. Packer
March 17, 2015
The Legal Intelligencer
For many of us, and our clients, identity theft, unfortunately, is an all-too-familiar topic.
Victims of identity theft and, in particular, tax-related identity theft and tax scams continue to increase at alarming rates. The Internal Revenue Service (IRS) estimates that it erroneously paid more than $5 billion in fraudulent tax refunds to identity thieves in 2013. Tax-related identity theft remains one of the biggest challenges facing the IRS … and taxpayers. As the 2014 tax filing season is in full swing and tax-return filing and refund frauds are increasing, a heightened sense of awareness is vital. In fact, the IRS recently issued a list of the "Dirty Dozen Tax Scams," many of which are occurring as this article goes to press. Lost wallets, stolen mail and data breaches put everyone at risk. Additionally, if you or your clients receive notice from the IRS that they may be a victim of identity theft or a recently filed tax return is unable to be processed, tax refunds may be in jeopardy.
If you believe you, or any of your clients, are victims of identity theft, you can notify the IRS that you, or they, are either actual or potential victims (in cases of a lost or stolen wallet, questionable credit card activity or credit report, etc.) by filing an IRS Identity Theft Affidavit so that the IRS will mark the taxpayer's account in question and issue an Identity Protection Personal Identification Number (IP PIN). These six-digit IP PIN numbers are unique to each taxpayer. They help to prevent the misuse of the taxpayer's Social Security number on fraudulent tax returns and to potentially avoid tax refund processing delays and erroneously issued tax refunds.
Unfortunately, tax-related identity theft is only one of many forms of tax-related scams impacting taxpayers recently. In the past year, the number of individuals affected by a rapidly growing IRS phone scam has skyrocketed, and millions of dollars have been swindled from its victims, prompting the IRS to continually issue warnings to the public. Callers fraudulently claim to be the IRS, often using fake names and fake IRS badge numbers to identify themselves. The caller insists that delinquent taxes are due and they must be paid immediately through a pre-loaded debit card or wire transfer. If the taxpayers resist, the caller becomes aggressive and abusive, threatening to freeze bank accounts, confiscate property or possible arrest. Alternatively, some have reported the scammers called claiming a refund is due, trying to obtain banking or other private financial information. Last year, more than 90,000 instances of these phone calls have been reported across the country.
Scammers are able to manipulate caller ID systems to deceptively show that the call originated from an IRS number. The scammers, in many cases, also have the taxpayer's personal information, such as the last four digits of their Social Security number. In many cases, follow-up emails and phone calls are made to apply urgency to the need of payment, with a sense of legitimacy.
If you or your clients receive a call from anyone claiming to be from the IRS, be aware that:
- The IRS will not call a taxpayer about tax delinquencies without first mailing an official notice.
- The IRS will not demand, via phone, that a taxpayer immediately settle delinquent tax obligations without offering the opportunity to appeal the amount owed.
- Taxpayers are not required to use a specific payment method when making payments — a variety of options are always available.
- Taxpayers will not be asked for credit or debit card information over the phone.
- The IRS will not threaten a taxpayer with local law enforcement action for not paying the requested amount.
Additionally, the IRS does not presently use email, text messages or social media to discuss personal tax matters. If you or your clients are in receipt of such a message, it is prudent to not open any attachments or click on any links contained in the message. Instead, forward the email to firstname.lastname@example.org and consider contacting a qualified tax professional.
If a call like the one described above is received and there is no reason to think that taxes are owed, the Treasury Inspector General for Taxpayer Administration (TIGTA) is asking taxpayers to call its integrity hotline at 1-800-366-4484 to report the incident. If taxes are owed or tax returns have not been filed, perhaps this is a good time to resolve the issue with the assistance of a tax attorney, CPA or other qualified tax professional.
If you think any of the foregoing cannot possibly happen to you, consider this real-life example the tax accounting group (TAG) of Duane Morris experienced.
TAG received a call on a Saturday morning from a well-known and successful lawyer of a small regional law firm regarding a panicked client experiencing an emergency situation. The lawyer's client received a call from an individual claiming to be an IRS federal agent, indicating he had the client's husband in custody pending settlement of an outstanding IRS debt. The caller instructed the client to meet him at a specified location with $10,000 in cash and her husband would be released from custody. She panicked and immediately called her husband's cellphone, which was not answered, resulting in a heightened state of fear. She called her lawyer to describe this horrendous experience but was too panic-stricken to listen to reason. Instead, she then went to the bank, withdrew $10,000 and met the caller at the location specified. The caller grabbed the money and ran, while the client was screaming, "Where's my husband?" She then immediately called back her lawyer, who, in the interim, contacted us for thoughts and guidance. Fast-forward a few hours. She received another call from the purported IRS federal agent, with another demand for $10,000 and the expressed promise of her husband's release. This time she listened to reason, and our advice dispatched to her lawyer. Later that day, when the husband returned from the golf course (his cellphone was in his locker at the clubhouse during golf), she was quite relieved to see him. Although he was upset when he learned of his wife's experience, the husband was more inflamed when he learned of her compliance with the fraudsters' request in the first place. Lesson learned … but a little too late.
A sound defense against tax and other forms of identity theft is to maintain a good offense. A few basic strategies to protect yourself from all forms of identity theft include, but are not limited to:
- Protect your personal information. Store your Social Security number in a safe place, not your wallet.
- Shred documents and mail that contain personal information but are no longer needed, such as credit card offers and statements, prior to discarding them.
- Check on all financial accounts regularly, as well as timely report and investigate any suspicious or unfamiliar activity.
- Change your passwords to online banking and credit card accounts regularly. If you must write them down, store them, as well as all financial documents, in a safe place; do not share your passwords with anyone.
- Do not click on links in emails where you are unfamiliar with the sender or that appear suspicious, even if from a friend or relative.
Michael A. Gillen, a certified public accountant, certified fraud examiner and certified in financial forensics, is the director of the tax accounting group of Duane Morris. He devotes his practice to federal, state and local tax compliance, planning and representation as well as a variety of litigation consulting services including, but not limited to, fraud and embezzlement detection and forensic and investigative accounting.
Steven M. Packer, CPA is a certified public accountant and senior manager in the group, where he devotes his practice to federal, state and local income tax compliance and planning, financial reporting, including generally accepted accounting principles/generally accepted audit standards consultation, as well as accounting, financial and management advisory services.
Reprinted with permission from The Legal Intelligencer, © ALM Media Properties LLC. All rights reserved.