Guard your refunds - Identity theft lurks

You have plenty of reasons to speed up the process of filing your individual tax return. The primary reason has always been that, if you're expecting a refund, you shouldn't wait any longer than necessary to receive it.

Add identity theft to your reasoning this year.

Identity thieves have found ways to fraudulently prepare tax returns and steal refunds from taxpayers, and they're doing it at exponential rates. In 2010, the IRS identified 49,000 returns that involved $247 million in refunds attributable to identity theft. In 2011, the numbers grew to 262,000 returns and almost $1.5 billion in fraudulent refunds.

Identity thieves haven't limited their victims to the living. Many families have suffered the passing of a loved one only to find that identity thieves had stolen the decedent's tax refund. Ironically, much of the information identity thieves use is received from the federal government.

Every year, when the Social Security Administration learns of individuals' deaths, it releases their names and Social Security numbers in a Death Master File. The file is meant to be confidential, but it has proven to be easily accessible.

The good news is that the IRS has been actively attacking tax frauds and identity thefts. And, it should be made clear that any tax refund stolen from a taxpayer will ultimately be refunded once the IRS is convinced of the taxpayer's identity.

But how long and how arduous is the process?

The better news is that the IRS has recently issued Form 14039, which essentially puts the IRS on notice of your identity (or a decedent's, if you're an executor). It's available to taxpayers who have been or may be victims of identity theft.

The taxpayer files Form 14039 with appropriate photocopies of identification. After someone files the form, the IRS will not send refunds, etc., to the addresses of others who make the same claims.

To lessen the chance of stolen refunds the following actions are recommended:

  • File individual returns, especially those with large anticipated refunds, as soon as practicable.
  • Don't ignore an IRS notice that indicates you've received wages from a job you've never held.
  • File Form 14039 if you have been an actual victim of identity theft.
  • File Form 14039 if you feel you are a potential victim of identity theft, e.g., if you've had a lost or stolen purse or wallet, questionable credit card activity, etc.
  • File Form 14039 if you're the executor for a decedent with a potential refund and recommend that others file for friends and loved ones who have recently died.

When clients fall victim to identity theft, they may feel that their IRS information is safe and that refunds are not at risk. And if clients don't feel the need to share identity theft issues with their accountant, they may miss an opportunity to protect their refunds.

In addition to helping identity theft victims clear up problems with their IRS accounts, the IRS works proactively to help ensure that these taxpayers do not encounter delays in processing their future returns.

In January 2011, the IRS launched a pilot program for Identity Protection Personal Identification Numbers (IP PIN). The IP PIN is a unique identifier that establishes that a particular taxpayer is the rightful filer of the return.

This program continues to be in place. In December 2011, the IRS mailed IP PINs to identity theft victims for them to use in filing their 2011 tax returns.

If you have been a victim of identity theft, it is recommended that you let your tax adviser know as soon as possible.

Written by co-authors Christopher P. Anderson, CPA, of Testone, Marshall & Discenza, LLP, the Syracuse, N.Y., member of CPAmerica International, and CPAmerica Tax Director Linda Harding, CPA

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