The springtime tax-filing season is also the prime time for tax frauds that use stolen personal information to file false returns seeking refunds.
“I.D. theft is rampant,” said Melanie Lauridsen, tax technical manager at The American Institute of CPAs (AICPA).
Year-to-date through October 2015, more than 100 million Social Security numbers had been stolen, Lauridsen said, citing IRS data.
And although the IRS says that through November 2015 it had blocked 1.4 million false returns and stopped $8 billion in fraudulent refunds, “billions more were able to go through and pass the [IRS’] filters,” Lauridsen said Wednesday on a call with reporters.
“This is very scary and very real for our taxpayers,” she said.
(Taxpayers also need to be on guard for phone scamsters purporting to be from the IRS demanding payment of back taxes. The IRS on Monday said it has seen a 400 percent increase in these phone-call phishing schemes.)
On the tax-return-fraud front, the AICPA and other groups are working on several programs with the IRS to stem the problem.
In a pilot program running for the 2015 tax year, the IRS has partnered with some payroll processors to put a unique code on W-2 wage-reporting forms.
“The code is individualized to each person, and is a very complicated algorithm that the IRS has control over,” Lauridsen said. The tax preparer inputs the code on the return, “so the IRS knows the preparer has legitimate copy of a W-2.”
If successful, a full rollout of the program would cover approximately 80 percent of taxpayers, Lauridsen added.
In another change, payroll processors and other tax reporters can begin to use truncated Social Security numbers on tax documents. The change was included in a budget appropriation bill signed by President Obama in December.
“The AICPA has long advocated for truncation of identity numbers … particularly on W-2s,” Lauridsen said.
Another IRS pilot program now lets all residents of the District of Columbia, Florida and Georgia get an IRS-issued PIN number.
The Service’s Identity Protection PIN program usually gives numbers only to those who have been victims of a proven I.D. theft, Lauridsen said. The PINs are used to ensure that a return is legitimate.
Because D.C., Florida and Georgia have high rates of tax fraud, the IRS pilot offers the PINs to any taxpayer in those areas.
Taxpayers should also be careful about using tax preparers and software, AICPA officials said.
“If you do your own [taxes], make sure to use a reputable software company,” said Cari Weston, director of taxation at the AICPA. “My general rule is to go with the bigger-name companies. That is usually the safer way to go.”
In addition, check out how a CPA or other tax preparer is securing information, Weston said. Don’t send personal identifiers in unencrypted e-mail, and don’t include any passwords in an email, she said.
Taxpayers can also check out preparers with the IRS. The agency gives all licensed tax preparers a preparer tax identification number, or PTIN.
“Each preparer has to request one if they prepare returns for a fee,” Lauridsen said. “The IRS actually goes through the trouble to verify everyone’s credentials, so if someone is out there claiming to be a CPA, a lawyer or a bunch of other things, the PTIN database will clearly say if the person has a credential, or if [they have] no credentials.”