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 that the taxpayer did not earn. This can be the result of someone else using the taxpayer’s identification number to file fraudulent tax returns, oftentimes seeking a refund that may or may not be due the innocent victim. In other circumstances, taxpayers will have their social security numbers stolen to enable the thief’s wages to be reported on our client’s social security number.

Cases of identity theft have increased to the point that the IRS has created an identity theft section located in Andover, MA. Correspondence to them should be sent to IRS Identity Protection Specialized Unit, 310 Lovell St., Andover, MA 01810-5430. For emergencies the section can be reached at (978) 684-4542. Once the identity theft matter has been brought to the attention of the IRS, the IRS may issue a PIN to use when filing the taxpayer’s return. Client should be advised to use only that PIN if he or she receives one. See notice 2010 TNT 245-16

Handling an Identity Theft Case

There are three courses of action available for identity theft matters 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.

If the clinic is contacted before issuance of the statutory notice of deficiency (90-day letter), the notebook and memorandum will be directed to Examination Division. If the clinic is contacted while a 90-day letter is pending, a petition 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.

A notebook should include the following information:

  1. 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.
  2. A memorandum with the statement of the facts. (See sample memos below.)
  3. A valid form of identification such as a Driver’s License, Military ID, State Identification Card, Social Security Card, Passport, etc.
  4. Credible documentary evidence of the identity theft, which will be exhibits to accompany 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 their 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.

Contents of Memorandum and Notebook

The memorandum should include the following:

  1. An introduction. Briefly describe the theft of identity (just a couple of sentences).
  2. Tax history section. Describe in detail the taxpayer’s prior filing history up to the time that 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.
  3. 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.
  4. 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;
    • That the client does not resemble the person that used his/her ID;
    • 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 ;
    • Contact the employer issuing the suspect 1099 or W-2 to determine if the client worked there.
    • If tax arises from unallowable deductions 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.
  5. Applicable Law
  6. Application of Law to the Facts; and
  7. 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 of Return Preparer Fraud (“RPF”) is related to identity theft since the taxpayer is claiming the filed return is null because it was not the document authorized by the taxpayer. However, RPF only applies to a sub-set of identity theft scenarios. The IRS defines RPF 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). RPF does not include incorrect advice from the return preparer (e.g., the deductibility of apartment rent).

Examples of RPF 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.

Handling a Return Preparer Fraud Case

In response to the growing number of RPF 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 notebook will 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 notebook should be submitted to the Appeals Officer or Chief Counsel Attorney. If the Clinic is contacted after the tax is assessed, the notebook is sent to:

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

Contents of Memorandum and Notebook

To make a claim, the student attorney should work with the client to prepare a notebook that includes IRS Forms 14157 and 141517-A, a signed return with the correct information, a supporting memorandum, and substantiating documents.

The documents should include a signed statement from the taxpayer stating that the taxpayer had no knowledge of the changes made to the return by the preparer. 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.”

The student attorney may support the RPF claim with documents that establish:

  • 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
  • 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
  • The return preparer has a history of RPF
    • Online forums in which other taxpayers report RPF
    • News stories reporting government investigations or prosecution for RPF

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. 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

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