As we embark on the 2023 tax filing season, I wish I could say that tax return identity theft has been eradicated, but that is simply not the case. Unfortunately, it is something that practitioners are likely going to continue to be burdened with. Here are some insights on this subject that I have dealt with on behalf of many taxpayers over the years.
E-filing Decision
Typically, tax practitioners find out about an identity theft situation when our tax software produces an e-filing rejection. One should note that not every e-filing rejection involves identity theft. On multiple occasions, I have experienced e-filing rejections when a young adult, often in college, filed their own income tax return unbeknownst to their parents. The parents’ transmission gets rejected due to claiming a dependent child who already claimed themselves. For high-income taxpayers, the dependent child provides zero tax benefit and only a modest state tax benefit. Upon removing the child as a dependent, recalculating the tax return and retransmitting, it typically ends up being accepted.
Another somewhat common e-filing rejection is when the spouse of a newly married couple uses her married name on the first jointly filed income tax return but has failed to change her last name from her maiden name with the Social Security Administration. Resubmission with the maiden name frequently solves that problem.
Alternatively, your client might receive correspondence from the IRS, usually from Austin, Texas, referencing their recently filed Form 1040 where it has yet to actually have been filed. Other telltale signs of tax return identity theft involve receiving an IRS transcript in the mail that was not requested or IRS correspondence pertaining to wages paid by an employer that the taxpayer never worked for.
Step One
When the e-filing rejection explanation is that either the taxpayer’s or spouse’s Social Security number was used on an electronically filed Form 1040 received by the IRS, you know that identity theft has occurred absent the unlikely circumstance where someone accidentally ended up using your client’s Social Security number. So now you have additional work to do in order for your client’s income tax returns to be filed.
When the federal income tax return rejects, the state income tax returns are halted as they are only transmitted once the federal income tax return is successfully e-filed. Typically, the first thing I do in this situation is to have the state income tax returns retransmitted by changing the input in my tax software to not transmit the federal income tax return. In almost every situation, the state income tax returns are successfully e-filed as the criminals usually only file phony federal income tax returns using a client’s Social Security number(s).
Step Two
My next step is to generate IRS Form 8948, Preparer Explanation for Not Filing Electronically. That form asks for entry of the reject code provided by the tax software. In most instances, IRS Form 14039, Identity Theft Affidavit, will be generated. If the taxpayer has not already paper filed their Form 1040, the instructions for Form 14039 call for it to be attached to the back of the paper tax return. A paper copy of the entire Form 1040 needs to be printed as was commonplace before the advent of e-filing, to be signed manually by both the taxpayer and tax preparer with attachment of W-2 forms and any 1099 forms where federal income tax was withheld.
Form 14039 alerts the IRS to the taxpayer being a victim of identity theft. It will lead to yearly issuance each January of a six-digit Identity Protection Personal Identification Number (IP PIN). This is somewhat of a two-edged sword as once issued an IP PIN, one cannot e-file without entering it in the signature area. Omission of an IP PIN will cause an e-filing rejection. As the name denotes, it provides protection as presumably an identity thief would have no ability to possess a taxpayer’s IP PIN. The IP PIN changes each January.
New Jersey and New York
If the taxpayer’s Form NJ-1040 cannot be e-filed due to identity theft, a Form NJ-1040-O, E File Opt-Out Request Form, is to be prepared and filed with the paper gross income tax return. The New Jersey Division of Taxation has a comparable form to Federal Form 14039, that being Form IDT-100, Identity Theft Declaration. Likewise, the New York State Department of Taxation & Finance has Form DTF-275 with the same title. Both state taxing authorities request submission along with their identity theft declaration forms of a copy of the taxpayer’s driver’s license, passport, U.S. military card or other ID issued by a state or federal agency.
Additional Considerations
Beyond getting the taxpayer’s Form 1040 paper filed, the IRS website, irs.gov/identity theft, provides a substantial amount of guidance to tax return identity theft victims. Various actions are suggested including filing a complaint with the Federal Trade Commission, contacting one of the three major credit bureaus (Equifax, Experian or TransUnion) to place a “fraud alert” on your credit records and the review of bank and credit card accounts for unauthorized transactions.
It is also conceivable that a taxpayer has experienced an event outside of the filing of their personal income tax returns that may warrant notifying the taxing authorities of concerns over tax return identity theft. This could include losing one’s wallet, having your home burglarized or falling victim to a variety of scams being perpetrated where the elderly are often preyed upon resulting in them divulging personal information over the phone to a complete stranger.
The IRS continually states that it does not initially contact taxpayers by telephone but rather does so via regular mail. Scammers will also resort to phishing emails where they attempt to trick the recipient into disclosing personal information such as passwords, bank account numbers, credit card numbers or Social Security numbers. The message recipient may be asked to click on a suspicious link or to download a malware file. Taxing authorities do not generally send email messages to taxpayers seeking information in order to approve requested refunds.