By William A. Raabe (Co-Editor, South-Western Federal Taxation Series).

Citizens have been plagued by identity theft for more than a decade. The most common tax manifestations of identity fraud include the purchase or theft of a taxpayer’s Social Security Number and then filing a tax returns claiming deductions credits or refunds that are sent directly to the perpetrator’s account. This can involve an earned income credit or fuels credit or any other carryforward. Typically, this results in a single large refund or a series over time.
The transaction may not be discovered by the taxpayer, or it might be discovered only by an IRS inquiry. It can be difficult and time-consuming to “unwind” the effects of identity theft.
Identity thieves often target elderly taxpayers. They may be more likely than others to give their social security numbers to strangers online in phishing or “prince Of Nigeria” schemes. Also, they may not file their Form 1040 due low income. The perpetrator will not trigger an alert if a return is filed twice.
Although the IRS has put in place internal procedures to address identity theft suspicions, these have not been coordinated with taxpayers or taxpayers with related inquiries. Although the IRS has issued a few warnings via general announcements and directives on irs.gov they appear to have not been sufficient to reduce the number of incorrect tax payments.
The Taxpayer First Act finally established a tax to the IRS to help offset the loss of revenue and inconvenience caused by identity theft. The act allows for very little in appropriations to implement these measures. Additionally, the “due dates” for corrective actions by the IRS can be vague or up to five year in the future. Here are some key provisions of the Act relating to identity theft.
The agency should stop using the social security number for identification purposes. After massive data breaches and black market activity, the GAO believes that SSNs have become almost ineffective as a secure form for identification. Two-factor authentication and drivers licenses would be more reliable and secure. The IRS must allow taxpayers adopt a new six digit Identity Protection PIN to replace the SSN to receive refunds and tax returns. This system is already in use by several states.
The IRS must provide a single point of contact to identity theft victims. This is in addition to the decentralized offices currently responsible for the issue. This would require a team consisting of specially trained IRS employees across various tax and function areas.
If there is suspicion that a taxpayer is a victim to identity theft, the IRS must notify him/her. Previously, the taxpayer would have to initiate contact. Often, one doesn’t know that the identity has already been stolen. This information should include instructions on how to report a violation and how to prevent such issues including how to use an IP PIN. The Service must inform the taxpayer about the status and the results of the case. This includes identity theft regarding the dependents of the taxpayer.
The IRS must provide a telephone-based resource for taxpayers. It will include descriptions of tax scams, ways to report them, and tips on how to avoid identity theft and other tax scams. However, this is not required to be interactive.
Return preparers who incorrectly disclose taxpayer information face increased penalties.
The IRS was also authorized by Congress to hire advanced tech employees to work under the Act. These employees are paid higher than the average agency employee. Encourage your students to think about a career with IRS or other consulting firms that work with it. This would combine technical tax knowledge with tech skills.
CLASS ASSIGNMENTS
Tax Policy
Identity theft often requires that the taxpayer being harmed participates in some way, e.g. Giving away social security numbers or bank account information or responding to fake IRS emails or websites. What should Congress be required do to “solve taxpayer’s problems”?
How could the IRS encourage tax professionals to help reduce identity theft? Give at least three suggestions to the Commissioner, e.g. as to sharing information or setting standards.
Tax Research
The Taxpayer First Act aims to simplify the disjointed approach the IRS used in combating tax-related identity thieves. The technical explanation of this bill will help you to understand the different parts of the IRS pre-Act approach. Next, describe the steps that the IRS must take to organize its anti-identity crime efforts.
How much new funding was C granted in the Taxpayer First Act?