Identity Theft

Tax Clinic Identity Theft Procedures

One of the defenses to the assertion of a federal income tax deficiency is that the tax is being imposed on income the taxpayer did not earn. This can be the result of someone else using the taxpayer’s social security number to a file fraudulent tax return, oftentimes seeking a refund that may or may not be owed to the innocent victim. In other circumstances, a taxpayer will have his social security number stolen to enable the thief’s wages to be reported on a tax return on which the stolen social security number is used.

Cases of identity theft have increased to the point that the IRS has created an identity theft unit. Correspondence to this unit should be sent to IRS Identity Protection Specialized Unit, 310 Lovell St., Andover, MA 01810-5430. For emergencies the unit can be reached at 800-908-4490.  Once the identity theft matter has been brought to the attention of the IRS, the IRS may issue a PIN to use when the taxpayer files his return. If the client receives a PIN, that is the only PIN the client should use. See Notice 2010 TNT 245-16

When handling an Identity Theft Case after filing of the power of attorney but before initiating any contact with the IRS, obtain the account, wage and income transcripts, and tax return transcripts. Once the IRS has notice of a possible Identity theft, the IRS adds a code that prevents access to the accounts through e-services.  When contacting the client, inquire if the client has contacted the IRS and caution him not to do so until you have had a chance to review the account.

There are three courses of action available when identity theft occurs, depending on whether the client contacts the clinic before issuance of a Statutory Notice of Deficiency (“90-day letter”), during the pendency of the 90-day letter, or after the tax is assessed and the client is receiving collection notices or in many instances when the IRS begins levying against the client’s assets.

If the clinic is contacted before issuance of the Statutory Notice of Deficiency, the notebook and memorandum will be directed to the Examination Division. If the clinic is contacted while a statutory notice of deficiency is pending, a petition to the United States Tax Court should be filed and then a memorandum and notebook should be prepared for submission to the appeals officer or chief counsel attorney. If the clinic is contacted after the tax is assessed, the memorandum and notebook are sent to the IRS Identity Protection Specialized Unit, at 310 Lovell St., Andover, MA 01810-5430.

Once the IRS becomes aware of a potential identity theft issue, the IRS usually prevents a taxpayer’s representative from reviewing a taxpayer’s e-services on-line information, discussing the case with an IRS representative, and in some situations the IRS even refuses to discuss the case with the client. When contacting the IRS, the first step is to request that the IRS unlock the ID theft block. If the IRS will not, then ask if they will fax the transcripts to the clinic fax number.  Absent the IRS’ willingness to do either, the student attorney can prepare a letter signed by the client, a sample of which is included below. In some instances the letter from the client may cause the IRS to unblock the account. This letter procedure is time consuming and should not be used as the preferred method of resolution unless the client wants a copy of the fraudulent return.  It is more expeditious to prepare an ID Theft package with memorandum.

To make the request, a signed letter with the following information should be sent to the IRS:

  • Our relationship to the victim of identity theft as authorized representative
  • Our mailing address
  • Your CAF number
  • Tax year(s) of the fraudulent return(s) you are requesting
  • Client’s name and social security number
  • Client’s mailing address
  • The following statement, with your signature beneath: “I declare that I am a person authorized to obtain the tax information requested.”

You may request a redacted copy of the fraudulent tax return that was filed and accepted by the IRS.  The victim’s name and social security number must be listed as a filer (not a dependent) on the fraudulent return.  Otherwise, the IRS cannot disclose the return information.  The redacted fraudulent return will feature enough information for you to determine how your client’s personal information was used.

Your letter must be accompanied by a copy of a government issued identification card (ex. driver’s license), as well as a copy of the clinic’s power of attorney (IRS Form 2848), and any additional documentation to the following address:

Internal Revenue Service
P.O. Box 9039
Andover, MA 01810-0939

Contents of Notebook and Memorandum

An identity theft notebook should include the following information:

  • Form 14039: Ensure that this form is properly prepared and signed by the taxpayer. Verify that the current version is used by checking the IRS website.
  • A memorandum with the statement of the facts. (See sample memos below.)
  • A valid form of identification such as a driver’s License, military ID, state identification card, Social Security Card, passport, etc.
  • Credible documentary evidence of the identity theft, which will be attached as exhibits to the memorandum. A police report and an FTC identity theft affidavit provide further evidence to support the client’s claim. The client should contact the police department in his local jurisdiction to file a report. The police department will provide a copy which can be used as evidence. The FTC affidavit is available online and includes a printable page for the client to sign.

The memorandum should include the following:

  • An introduction. Briefly describe the theft of identity (just a couple of sentences).
  • Tax history section. Describe in detail the taxpayer’s prior filing history up to the time his identity was stolen. Point out what actions the client took to prepare a correct return for the year of the identity theft. If the client has no filing requirement, establish this with a transcript of the wage and income reported to the IRS. If some of the W-2s or 1099s are not the client’s, discuss these in the factual analysis section below. If the client has a filing requirement without regard to the fraudulent income items, the original executed copy of a correct return should be prepared and submitted with the notebook.
  • Personal Historical Background. Describe the client’s personal background, health, educational history, work history (with particular attention to his work history at the legitimate employer), and where he lives. In cases where a fraudulent return or wage report (W-2 or 1099) has been filed by someone other than the client, you can contrast the client’s actual address with the reported address.
  • Factual Analysis. Demonstrate that the income is not that of the client. This discussion and factual analysis may include:
    • A showing that the client could not have worked at the particular other source of income by showing that it was located in another state or across town and they couldn’t be in two places at once. This is useful when a client’s Wage & Income transcript includes income from jobs the client did not have. Use internet tools to demonstrate this, such as MapQuest or Google maps. Obtain an affidavit from the actual employer that attests to the fact that the client had a 40 or more hour a week job. Obtain any vacation records showing he did not take time off on the dates and times when he was supposed to have worked at the other job. In some instances ACCURINT will assist you with proof;
    • A showing that the client does not resemble the person that used his/her ID;
    • A showing that none of the income has shown up in his/her bank account(s). Demonstrate this by including bank statements for the period of the identity theft. It may be necessary to include 12 months of statements;
    • Verification from the employer that issued the suspect 1099 or W-2 of whether the employer ever employed the client.
    • If tax arises from unallowable deductions that were claimed to obtain the Earned Income Tax Credit, point out that the client could not have incurred those expenses.
    • Describe the harm suffered by the client from the identity theft. Some examples of harm include: bank accounts have been tampered with, fraudulent signatures on checks or other documents, or copies of 1099s or W-2s that the client indicates are not his.
  • Applicable Law
  • Application of Law to the Facts; and
  • Conclusion

The IRS Identity Theft form, valid identification, and the evidence described above are included as exhibits to the memorandum. Ensure that a complete and exact copy of the entire notebook is retained as a file copy. It should also be scanned and saved to the client’s file.

After review of the memorandum by the Clinic Director is complete, the completed (ready for mailing) copy should be submitted to the Associate Clinic Director along with the file copy. The Associate Clinic Director will initial the file copy to acknowledge that the original is ready to be mailed.

For cases where the tax has been assessed, the student should follow-up at a minimum within 10 days of mailing to ensure that the notebook was received and then each 30-45 days thereafter. For follow up you can use the IRS Identity Protection Specialized Unit hotline (1-800-908-4490). Use this number only for previously submitted matters. For docketed cases, the student should follow up with the appeals officer or chief counsel attorney. The IRS is currently using a CP01 notice to inform the client that the IRS has received the information, verified the claim of identity theft, and placed an identity theft indicator on the account. See the sample CP01 Notice below.

Return Preparer Fraud

Tax Clinic Return Preparer Fraud Procedures

The defense that a taxpayer can raise of Return Preparer Misconduct (“RPM”) is related to identity theft because the taxpayer is claiming the filed return is null based on the fact that it was not the document that the taxpayer authorized. However, RPM only applies to a sub-set of identity theft scenarios. The IRS defines RPM as occurring when “the tax return preparer completes a return for a taxpayer and without the taxpayer’s knowledge makes changes to the return, which results in an improper refund to the preparer or a third party.” (IRS IGM Return Preparer Fraud or Misconduct, June 5, 2012). If the taxpayer, rather than the preparer or a third party, received an improper refund as a result of RPM, there is a mechanism in place under the RPM guidance to adjust the taxpayer’s account to reflect the appropriate refund.  An RPM defense cannot be raised if the improper refund was the result of merely incorrect advice from the return preparer (e.g., a return preparer erroneously believed that personal apartment rent is a deductible expense)

Examples of RPM include: (1) the preparer submits a fraudulent Schedule C reporting fictitious business expenses, reducing the taxpayer’s taxable income; (2) the preparer submits a fraudulent Schedule A reporting itemized deductions for fabricated charitable contributions; or (3) the preparer includes false dependents to increase the taxpayer’s EITC. In many cases, the return preparer will have requested that the refund be split so the taxpayer receives the expected refund while the excess is diverted to the return preparer.

There are three sources of information to consult when addressing RPM issues:

  • IRM 25.24, Return Preparer Misconduct Program (applies only to cases not covered by the interim guidance below);
  • WI-25-1215-004, Interim Guidance on Allegations of Return Preparer Misconduct for IDTVA RPM Accounts Management (AM) ONLY for Cases Tax Year 2013 (and prior) Received On or Before 12/31/2015 (only for cases prior to tax period 2014 that were suspended on or before December 31, 2015); and
  • WI-25-1215-003, Interim Guidance on Allegations of Return Preparer Misconduct for the Identity Theft Victim Assistance – Compliance (IDTVA-C) ONLY for Tax Year 2013 and Prior (Suspended Cases Only) (only for cases prior to tax period 2014 that the IRS received on or before December 31, 2015).

In the latter two documents interim guidance is provided. In the first item, a new Internal Revenue Manual section is added. These pronouncements set forth the Commissioner agreement to issue refunds where the preparer filed an improperly altered return for a taxpayer that resulted in an improper refund sent to someone other than the taxpayer.  If the taxpayer received the full improper refund as a result of RPM, then these materials provide a mechanism for the IRS to adjust the taxpayer’s account to reflect the proper refund.  The IRS issued the interim guidance for a number of cases pending where the IRS did not believe it had the authority to issue refunds where the return preparer took the refund.

Handling a Return Preparer Misconduct Case

In response to the growing number of RPM claims, the IRS has created a special reporting process. If the Clinic is contacted before issuance of the statutory notice of deficiency (90-day letter), the brief, with accompanying exhibits, should be directed to Examination Division. If the Clinic is contacted while a 90-day letter is pending, a petition to the United States Tax Court should be filed and then the documents should be submitted to the Appeals Officer or Chief Counsel Attorney. If the Clinic is contacted after the tax is assessed, the documents should be sent to:

Internal Revenue Service
AM – Preparer Complaints
Mail Stop 58
5333 Getwell Road
Memphis, TN 38118

Contents of Memorandum and Notebook

To claim a refund, the documents to include in the notebook submitted to the IRS should include the brief, exhibits, Forms 14157 and 141517-A, and a signed return with the correct information, a supporting memorandum, exhibits that substantiate the taxpayers allegations, and a signed statement from the taxpayer stating that the taxpayer had no knowledge of the changes that the preparer made to the return. The statement should end with this phrase above the signature:  “This statement is true to the best of my knowledge and belief, under penalties of perjury.”

In any RPM claim, the IRS now requires the following documentation (see IRM 25.24.1.3):

  Form 14157, Complaint:

  Form 14157–A, Tax Return Preparer Fraud or Misconduct Affidavit

  The return preparer’s name and address

  Signed, valid tax return of the taxpayer submitted with the claim

  Official report from a law enforcement agency (only in cases where the taxpayer is seeking an additional refund) that is signed by a police officer or equivalent and that contains: (1) the relevant tax years; (2) the return preparer’s first and last name and address; and (3) a statement that describes the RPM and the theft of the refund.

  Signature of the tax return preparer on the return that the preparer filed by the preparer or, if it is an electronic return, the preparer information.  If there is no signing preparer, additional corroborating evidence for the ghost preparer is required.  See the specific ghost preparer documentation requirements in I.R.M. 25.24.1.3.

Exhibits should support the RPM claim by establishing, as follows:

  • If the improper refund was not received by the taxpayer:
    • Bank statements showing a refund deposit for the correct refund and not the excess
    • IRS records indicating that the refund check was mailed to an address not connected with the taxpayer
  • If the return, as filed, was not signed by the taxpayer:
    • A copy of the return given to the taxpayer by the preparer showing different information than the return filed
    • A signature on the return that does not match the taxpayer’s signature
    • The taxpayer authorized electronic filing and did not have the opportunity to review the return as filed
  • If the return preparer has a history of RPM:
    • Online forums in which other taxpayers report RPM
    • News stories reporting government investigations or prosecution for RPM

After the Clinic Director reviews the brief, the completed (ready for mailing) copy should be submitted to the Associate Clinic Director along with the file copy, who will initial the file copy to acknowledge that the original is ready to be mailed. Ensure that a complete and exact copy of the entire notebook is retained as a file copy. It should also be scanned and saved to the client’s file.

Resources

Letter requesting copy of ID Theft Return
Sample Memo, Identity Theft

Sample Memo, Fraudulent Return
Sample Memo, Fraudulent W-2
Sample Memo, Return Preparer Fraud
Identity Theft Affidavit – IRS Form 14039

Pub. 4535 (EN/SP) (Rev. 10-2008) – Identity Theft Prevention and Victim Assistance
I.R.M. 21.9.2.1 (10-1-2010), Accounts Management Identity Theft
I.R.M. 5.1.12 , Collection Procedures, Cases Requiring Special Handling