We’ve all heard the news stories about data theft. Stories about a data breach, whether it be at a large retail chain, a healthcare facility or a stolen laptop, have become all too common. Some may remember when our social security number was used as a means of account identification and even in some states, for a driver’s license number. Fortunately those practices have ended. However, the inclusion of a social security number in data files (computer and paper), still puts us at risk for identity theft. So when we hear these news stories about data theft, we don’t really know what information, or how much information about us was hacked. Tax identity theft occurs when someone has stolen a person’s identification and social security number in order to file a tax return to claim a refund.
Some people first learn that they have been a victim of tax identity theft when they are informed by their CPA that their tax return was rejected by the IRS because “a tax return with that identification number has already been filed.” That short message is very troubling. It means that someone filed a fraudulent return with your ID and now the process of filing your correct return and collecting your refund (if one is owed to you), will become an ordeal. The questions begin. What information was stolen? Where was it stolen from? How did it happen? If it is a joint tax return, the questions arise as to whose ID was stolen? Unfortunately, these questions cannot be answered immediately and even after the IRS investigates the theft, the source may never be known.
If your 2014 tax return was rejected by the IRS because a return had already been filed, then you should have submitted Form 14039, Identity Theft Affidavit. This affidavit puts the IRS on notice that you think you are a victim of identity theft. When you file Form 14039, the IRS will then take extra steps to handle your tax return. Since a refund has already been paid on your social security number, it now becomes necessary to demonstrate to the IRS that the tax return you are submitting is the correct one. Of course this adds time to processing your legitimate tax return. Once you file Form 14039, the IRS will assign you a six digit Identity Protection Personal Identification Number (IP-PIN). You will need to use your assigned IP-PIN number for the subsequent year’s tax return. The IRS will issue a new IP-PIN number each year. The use of this IP-PIN is necessary when communicating with the IRS regarding your tax returns, whether you speak to the IRS, or your CPA interacts on your behalf.
If you are not a victim of tax identity theft, but are aware that some of your personal information was involved in a data theft, you can file Form 14039. Even if you did not file Form 14039, the IRS will issue an IP-PIN if you have been identified as a tax identity theft victim through the IRS’s own anti-fraud programs.
If you were a tax identity theft victim in 2015, you should have recently received notice CP01A from the IRS informing you of the IP-PIN to use on your 2015 tax return. You will need to share this IP-PIN information with your tax preparer, as they will not be able to submit your tax return electronically unless that IP-PIN is used to identify you on the tax return. You need to use the IP-PIN for any person included in that tax return for which an IP-PIN was issued. For example, if the person whose identity was stolen is a spouse or a dependent, an IP-PIN needs to be used with that individual’s identification data in the tax return. If you think it might be easier not to file electronically and revert to mailing a paper tax return, the IRS advises that even for paper filed returns, you use the IP-PIN so as not to delay processing. If you are expecting a refund when you file, you do not want to delay that processing.
The risks of identity theft in today’s world are great. In her September 2015 report to Congress, Taxpayer Advocate Nina Olsen reported that the IRS has a current inventory of over 600,000 tax identity theft cases. Taking steps to protect your identity in all transactions is important. One of the goals of the IP-PIN program is to prevent individuals from becoming recurring victims of tax identity fraud. So while an IP-PIN number is one more piece of information you need to gather for preparing your taxes, hopefully it will make the process easier for filing your 2015 tax return.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.