IRS Identity Protection Efforts
Accordingly, it is important to stay alert. Although the effects of identity theft may be daunting it is important to develop practices that will prevent a situation from occurring. In an effort to help assist with the development of these practices the Internal Revenue Service (“IRS”) has worked with state revenue departments and the general tax industry in an effort to keep the public informed on ways to help increase protection. Listed below are seven steps the IRS has recommended to make identity protection a part of your routine to keep your information safe:
- Review both credit card and bank statements for any uncommon charges that may appear. Although some charges may be very small, it is important to stay informed as to what is being listed on your bill. As an additional means of caution, a bank or credit card company will never solicit important personal or financial information via email; never update an account if you are unsure of the validity of the information request.
- Research any incoming notices or communications from the IRS. Notices that may indicate identity theft include: letters on tax returns that were not filed, income that was not earned, or unknown employers.
- Review your credit reports annually. You can utilize various sources such as www.annualcreditreport.com on an annual basis to review your personal credit reports at no cost.
- Review your annual statement on Social Security income, looking out for any excessive or unusual income amounts. Electronic accounts may be accessed at www.SSA.gov.
- Confirm that any claims on your health insurance statements are for care you’ve received and scan the statement for any false claims.
- Be sure to properly dispose of any documents containing your personal or financial information. It is important to never throw documents with this information in a general trash bin as your information may be compromised.
- Utilization of the IRS’ direct deposit service provides a secure option to receiving your annual tax refund directly in your account. This direct deposit service may also be used for Social Security or Veterans Affairs benefits.
These are just a few tips to keep your identity protected and your information safe on an ongoing basis. Taxpayers should take full advantage of the available resources of protection in order to maintain an uncompromised identity.
Taxability of Identity Protection Services
IRS Announcement 2016-2, 2016-3 IRB 283 states that “After considering comments received as requested by earlier guidance on this issue (and expressed in Ann. 2015-22, 2015-35 IRB 288), IRS is extending ruling that value of identity protection services provided to consumers whether before or after possible breach of data security won’t be includible in service recipient’s gross income. Nor will these amounts have to be reflected by employers in employees’ gross income and wages. However, cash received in lieu of protection services is still includible. IRS noted that treatment of proceeds recovered under identity theft ins. policy is covered by existing law.”
This expanded relief provides taxpayers with nontaxable treatment of identity protection services before a breach occurs in an effort to encourage earlier detection and minimize the impact of identity theft.
Accomplishments
The IRS has been actively collaborating efforts to protect taxpayers from identity theft tax fraud. Leaders from the IRS, States and private industries have joined forces to form the Security Summit partnership (“Summit”) to protect taxpayers from identity theft and fraud. The Summit’s accomplishments in the past year include the following:
- Updated taxpayer security credential protocol to include a minimum eight-digit password and security questions;
- Collaboration with software providers to identify potential fraud through confidential elements;
- Industry partners reviews to identify possible identity theft schemes were reported to the IRS and States to help stay on top of emerging issues; and
- The launch of the 2015 “Taxes. Security. Together” campaign which was created to increase public awareness of computer security and tips on how to protect personal information.
According to IRS Commissioner Koskinen, the above accomplishments impacted identity refund fraud as follows:
- From January through April 2016, the IRS stopped $1.1 billion in fraudulent refunds claimed by identity theft on over 171,000 tax returns; compared to $754 million in fraudulent refunds claimed on 141,000 returns for the same period in 2015;
- Private sector leads identified 36,000 suspicious returns in 2016 claiming $148 million in refunds, which is double the amount claimed in 2015 claiming $98 million;
- The number of Identity Theft Affidavits and other identity theft correspondence filed with the IRS dropped 48% from 2015 to 2016;
- Refunds returned to the IRS from banks and financial institutions dropped 66% over the same time period; and
- Reported emerging issues and scams enabled the Summit to warn the public, payroll industry, human resources and tax preparers.
Future Initiatives
Outlined below are some of the initiatives that the Summit is working during 2017 as they relate to identity theft issues.
Tax return preparers are experiencing a significant increase in identity theft. As a result, the IRS is launching a new campaign entitled “The Protect Your Clients; Protect Yourself” to help tax preparers safeguard and protect client information.
In addition, taxpayer awareness is expected to increase as the expansion to the 2015 “Taxes. Security. Together” campaign will focus on education and outreach. The goal is to reach 700,000 tax return preparers and provide them with the necessary information and tools to protect them from being compromised and to protect client information.
IRS Fact Sheet 2016-23, Protect Your Clients; Protect Yourself from Identity Theft, issued in July, 2016 outlines warning signs, prevention, identifying fraud, prevention and resources. IRS Publication 4557, Safeguarding Client Data, provides a more comprehensive view and provides tips and links to additional information.
A new Identity Theft Tax Refund Fraud Information Sharing & Analysis Center will start in 2017. This is intended to centralize, collect and analyze data.
A process was created for financial institutions to validate questionable state tax refunds. At this time, 23 states have signed on.
The IRS is expanding the W-2 Verification Code pilot in 2017 by implementing a special protective 16-digit code to be included on Forms W-2 to be entered on the tax return to confirm the accuracy and integrity of tax returns filed electronically. Last year this pilot program involved various payroll service providers filing two million Forms W-2. In 2017, the IRS is planning to expand this program to include fifty million Forms W-2.
The IRS and States will require new data elements from individual and corporate returns to improve taxpayer authentication. These are in addition to the additional 20 elements implemented last year.
The Summit work is ongoing. As of July 1, 2016 the Summit will fall under the Electronic Tax Administration Advisory Council, whose charter was expanded to include identity theft.
Conclusion
The IRS is addressing rapidly evolving identity theft and refund fraud schemes with its aggressive strategy of prevention, detection and assistance and has made it one of its highest priorities. The IRS website provides information and many tools and resources. The IRS continues its efforts to protect Taxpayers and help victims of identity theft and refund fraud. As outlined above it is extremely important to be aware of and take the necessary steps to combat identity theft as it relates to protecting your own identity.
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The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.
