Congress Probes Tax Prep Fraud and Identity Theft

The House Judiciary Committee’s Crime Subcommittee held a hearing Thursday on the growing problem of identity theft and income tax preparation fraud.

Nina Olson

“The number of these thefts has increased by approximately 300 percent every year since 2008,” said Judiciary Committee Chairman Lamar Smith, R-Texas. “The Internal Revenue Service detected almost 1 million fake returns among the 2010 returns alone. Tax thieves victimize innocent taxpayers in a number of ways. They often file fake returns under a false name or claim someone who is no longer alive as a dependent on their own forms.  Often, the fraud is not detected until an individual files a legitimate tax return that is rejected by the IRS because a false return has already been filed and the refund paid. Tax return identity theft is a very real problem. Congress should do all it can to protect citizens from this crime.”

Smith is one of the original co-sponsors of H.R. 4362, the “Stop Identity Theft Act of 2012,” with Congresswoman Debbie Wasserman Schultz, D-Fla., a bipartisan bill that strengthens criminal penalties for tax return identity thieves.  H.R. 4362 adds tax return fraud to the list of predicate offenses for aggravated identity theft and expands the definition of an “identity theft victim” to include businesses and charitable organizations. It also improves coordination between the Justice Department and state and local law enforcement in order to better protect groups that are most vulnerable to tax fraud so they are not future victims. 


“The changes to federal law proposed by H.R. 4362 are important to keep pace with this ever-increasing crime,” said Smith. “Tax identity theft costs American families and taxpayers millions of dollars each year. We can help reduce the number of people who are victimized by this crime.”

Sanford Zinman, National Tax Policy Chair of the National Conference of CPA Practitioners, was among the witnesses at the hearing. He noted that the IRS’s Identity Protection Specialized Unit has documented a 280 percent increase in identity theft since 2010. Zinman is a sole practitioner in White Plains, N.Y., who has been preparing individual and small business tax returns, as well as sales tax and payroll tax returns, for over 35 years. 

“The real issue is what identity theft does to individuals and what can be done to combat the problem,” said Zinman. “It is reasonable to presume that every American has either been personally affected by identity theft or has known someone who has been a victim. This is a good definition of an epidemic. Identity theft can destroy a person’s life. It can prevent them from buying a house or a car, getting a credit card or even having a bank account. It can even hamper someone’s ability to get a job. The problem of identity theft will not go away.”

He noted that in January the IRS and the Justice Department engaged in a massive national sweep to crack down on suspected identity theft perpetrators as part of a stepped-up effort against refund fraud and identity theft. Working with the Justice Department’s Tax Division and local U.S. Attorneys’ offices, the nationwide effort targeted 105 people in 23 states.

“The Internal Revenue Service has, for many years, recognized the serious issue of identity theft and has instituted measures to combat identity theft and continues to do so,” Zinman added. “However, many of the IRS ‘fixes’ can be cumbersome and time consuming. Beginning in 2008 the IRS implemented Service-wide identity theft indicators which are placed on a taxpayer’s account if the taxpayer claimed they were a victim of identity theft. But these indicators are implemented only after the taxpayer contacts the Service with certain required substantiation documentation. The IRS can then issue an ‘Identity Protection PIN’ which allows the legitimate taxpayer’s return to bypass the identity theft filters. In mid-November 2011 selected taxpayers received an IP PIN Notice letter notifying them that they would be receiving an IP PIN for use when filing their 2011 return. In mid-December 2011 these taxpayers received a second letter with their IP PIN which was a single-use six-digit PIN. Some of these letters caused confusion when returns were filed partly because the program was so new. Some letters were lost, which caused problems with filing returns. Some taxpayers forgot to tell their preparers that they received a letter with an IP PIN. Since this was a limited program the negative impact was very limited. Obviously, better communication could result in better outcomes.”

Taxpayer Advocate Copes with Identity Theft Problems
National Taxpayer Advocate Nina Olson noted that she had discussed the problem of taxpayer identity theft in the report she released to Congress on Wednesday (see National Taxpayer Advocate Sees 2013 Filing Season ‘At Risk’). But her experiences with identity theft go back many years.

“My first of many experiences with identity theft occurred when I was the founder and executive director of The Community Tax Law Project, the first independent nonprofit low income taxpayer clinic in the country,” she said. “CTLP provides pro bono legal representation to low-income taxpayers throughout Virginia. In 1993, a legally resident agricultural worker came to CTLP with Internal Revenue Service assessments for additional tax purportedly attributable to unreported wages. My client and I spent the next four years proving to the IRS that it was impossible for him to be working and physically present at three different locations at the same instant. Because the identity thieves—several co-workers on one job from years before—continued to work under my client’s name and Social Security number, we had to prove each year to the IRS that my client did not earn the unreported income. At that time, the IRS did not have any system to flag my client’s account and avoid tormenting and burdening him each year. Somehow, the fact that my client was the victim did not make any impression on the IRS.”

Olson noted that her experiences as a tax lawyer representing clients in identity theft and other cases have served as a guide in her role as the National Taxpayer Advocate at the IRS. She acknowledged that the IRS has adopted many of her office’s recommendations to help victims of identity theft and refund fraud, but believes they need to go further.

“Certainly, refund-driven tax fraud is not a problem the IRS can fully solve, but I believe that the IRS can do much more to detect questionable returns and assist victims of identity theft or return preparer fraud,” she added.

Olson said the IRS should take steps to limit the opportunities for refund fraud, while not unreasonably delaying legitimate refund claims. But she noted that the IRS has been slow to develop procedures to assist victims of return preparer fraud. Olson recommended that the IRS should develop procedures to replace stolen direct deposit refunds, but she cautioned that creating new exceptions to taxpayer privacy protections poses risks and should be approached carefully, if at all.

Mo’ Money Taxes Fraud
Olson noted one high-profile investigation of a tax return preparation firm has resulted in many TAS cases. On March 14, 2012, the Illinois Attorney General’s office sued Mo’ Money Taxes, a tax preparation service and lender based in Memphis, Tenn. The suit accuses the company of filing unauthorized federal income tax returns and charging undisclosed and exorbitant fees for tax preparation services. The Attorney General alleged the returns were riddled with errors and the company failed to provide some customers with their promised refund checks, Olson noted. The Attorney General’s office contacted her office for assistance, and the Taxpayer Advocate Service agreed to take the following steps: provide information to alleged victims about seeking assistance from the IRS; ensure the IRS was aware that taxpayers would need assistance; and coordinate actions such as holds on collection activity on the taxpayers’ accounts.

To date, TAS has received 76 inquiries related to Mo’ Money issues, all of which resulted in new TAS cases. “We are able to provide some form of relief to the taxpayer in 56.6 percent of the closed cases,” said Olson.

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