- Tax-related identity theft is when a bad actor uses a taxpayer’s Social Security number or other personal information to file a fraudulent tax return
- Suspected identity theft cases made up around 50% of all suspended returns in 2022
- The Automated Underreporter (AUR) is an IRS unit that identifies discrepancies in tax returns and uncovers issues like identity theft
- Several AUR changes in 2022 impacted the process for identity theft issues
- Eight ways to avoid tax-related identity theft:
- Be careful with your Social Security number
- Improve password protection
- Look out for phishing scams
- Store and dispose of documents properly
- Get rid of preapproved credit card inquiries
- Protect your computer
- Watch for fraudulent tax returns
- Respond to IRS notices right away
Tax fraud is one of the biggest headaches taxpayers and the IRS have to deal with each year. One form of tax fraud to be on the lookout for is identity theft. Tax-related identity theft may occur when someone gets your personal information and uses it to file a fake return so they can get a tax refund in your name.
The IRS updated its Automated Underreporter (AUR) program last year, which involved changing the process for addressing identity theft instances. The agency previously was under fire for failing to alert victims of identity theft it found related to fraudulent tax returns.
Keeping up with the latest tax law changes and how you can avoid identity theft can help you stay in good standing with the IRS. This guide covers everything you need to know about tax-related identity theft, identity theft AUR 2022 changes, and eight ways to avoid this type of identity theft.
What Is Tax-Related Identity Theft?
Identity theft related to taxes is a growing concern, especially in our digital age. Tax-related identity theft occurs when someone uses another person’s stolen Social Security number or other personal information to file a fraudulent tax return and claim a refund.
Identity theft can cause significant financial and emotional distress for the victim, as they may not be aware their identity has been stolen until they receive an unexpected notice from the IRS about a tax return they did not file. Dealing with the aftermath of identity theft can be time-consuming and frustrating, as victims may have to prove their identity and resolve fraudulent activity on their accounts.
The IRS has implemented various measures over the years to help combat tax-related identity theft, such as increasing security protocols for online tax filing and partnering with state tax agencies and industry leaders to share information and best practices. The agency also provides resources for taxpayers to protect themselves from identity theft, such as regularly monitoring their credit reports and being cautious of phishing scams or unsolicited emails claiming to be from the IRS.
Tax-related identity theft remains a serious issue, despite these efforts. One annual report noted that suspected identity theft cases made up around 50% of all suspended returns in 2022, and the IRS reported 2.9 million identity theft cases in its inventory in December 2022.
The IRS has, in the past, been found to fail to notify the victims, even when over a million taxpayers were victims of identity theft. They previously did not have a system in place for notifying victims. The IRS now, however, states it will alert a taxpayer if the agency has a suspicious tax return with their name on it, as part of their Identity Theft Victim Assistance program. Note that the agency may not know someone is an identity theft victim until it starts processing the return or conducts an audit.
The first step if the IRS finds something suspicious is to send you Letter 488C, which asks you to respond and verify your identity within 30 days. The agency will verify your identity and will then ask you if you filed the tax return it has questions about. The IRS will remove it from your records if you didn’t file it, and if you did, the agency will move forward with that tax return processing. The IRS also states that a taxpayer should let the agency know if they have been a victim of tax-related identity theft.
What Is the AUR Unit?
The AUR unit is an IRS division that is responsible for identifying discrepancies between the income reported on tax returns and the income reported by third-party sources, such as employers and financial institutions. The AUR program uses automated systems to match taxpayer information with data reported by third-party sources and then sends out notices to taxpayers if there are any discrepancies found. These notices typically request additional information or clarification from the taxpayer to resolve the issue. The AUR process is made up of four key phases:
- Case analysis or screening
- Response, which includes issuing CP2501 and CP2000 notices
- Statutory Notice CP3219A, which is required legally as a final notice
- Reconsiderations, or closed case correspondence
CP2000 or CP2501 notices indicate to the taxpayer that the IRS has found a discrepancy and is requesting more information or an explanation of the issue it found. A common finding is that a taxpayer underreported their income, and so the taxpayer would owe more taxes.
A key part of the first AUR phase is determining whether or not a case needs special handling for identity theft. This may include routing to specific people or conducting further research into a potential identity theft incident. The IRS states that these cases are identified within all four phases of AUR and are considered priority work every day.
Identity Theft Cases and Claims in 2022
Identity theft cases continue to be high each year, contributing to unwanted, time-consuming situations for both the IRS and taxpayers. The AUR changes altered a few systemic points for IRS officials on Sept. 29, 2022. Here are those changes to know:
Screening IRS Notice Responses
The IRS screens all CP2501 responses for identity theft claims. These responses are replies to CP2501 notices, which indicate the IRS found a taxpayer’s information on their tax return didn’t match information they received from another party, like an employer.
These notices are issued for larger discrepancies of at least $100,000, cases that may involve a refund, and missing reporting from Schedule K-1 of at least $50,000. Letter 2625C is not screened for identity theft. This letter requests additional information from a taxpayer for further explanation after they’ve already responded to the CP2501 notice.
Special Handling for Prepared Tax Returns
The IRS requires special handling regarding identity theft for tax returns that have Form 14157, Complaint: Tax Return Preparer or Form 14157-A, Tax Return Preparer Fraud or Misconduct Affidavit. These forms mean there was tax preparer misconduct.
Priority Handling for IPC SI Cases
The IRS will automatically place a case into something called BT 89003 when the tax examiner codes the case with stolen identity (IPC SI). Any cases that have been placed in BT 89003 are required to have priority handling, meaning the tax official needs to hand-walk them to the right AUR identity theft official.
Reporting Under the Right Codes
Tax examiners must also be sure to report and code time spent on identity theft cases properly. They are required to specifically use the IRS’s Organization, Function, and Program codes.
The IRS continues to update its processes and guidelines to help taxpayers avoid falling victim to identity theft. Talk to a seasoned tax expert when you’re worried about identity theft or have questions about a notice you received from the IRS.
Eight Ways to Avoid Tax-Related Identity Theft
You can take certain steps to minimize your identity theft risks so you don’t have to deal with long IRS processes and the aftermath of a fraudulent tax return. Here are eight ways to avoid tax-related identity theft:
1. Be Careful With Your Social Security Number
The IRS and other government entities identify you by your Social Security number, and that number is often involved in cases of identity theft. Don’t carry your Social Security card or any other document that has the number on it. Never send your number to other people or third parties unless it is a trusted institution, and avoid sending it to anyone over email.
2. Improve Your Password Protection
Any website you use that accesses your personal and financial information should have a very strong password that’s updated regularly. It should be unique from any of your other passwords. Strong passwords are long; combine a mix of upper and lowercase letters, numbers, and symbols; and don’t include a name of something related to you that someone else could easily guess.
3. Be on the Lookout for Phishing Scams
Phishing scams are increasingly common, especially related to gathering your financial information. Phishing occurs through email or text message, and the hacker tries to get you to provide your account information or Social Security number. Trusted institutions will not request information this way. The IRS will never reach out to you to collect your personal information over email. It will send you an official letter in the mail if you owe taxes or made a mistake on your tax return. Watch out for phone calls when someone is pretending to be an IRS agent.
4. Store and Dispose of Sensitive Documents Properly
You may receive a lot of physical mail that includes details like your bank account numbers and Social Security number. Don’t just throw these documents away. Either store them somewhere secure within your home or shred them. This information could otherwise get into the wrong hands.
5. Get Rid of Preapproved Credit Card Inquiries
You may think that as long as you don’t respond to credit card solicitations through the mail, you’re fine since you’re not providing your personal information. Identity thieves, however, have been known to open credit cards under someone else’s name and eventually get other personal information, like their Social Security number. Shred these inquiries and call 1-888-5-OPTOUT to get off the list of credit card offers.
6. Protect Your Computer
Make sure your computer has firewall and antivirus protection to prevent attacks, which can lead to a hacker getting your personal details. Never click on any links or download attachments if you get a suspicious email, as malicious links or downloads could lead you to download ransomware or provide personal information to a malicious actor.
7. Watch for Fraudulent Tax Returns
Someone may have fraudulently filed a tax return in your name if you try to file your legitimate return and the IRS rejects it because there has already been a return with your Social Security number. You should then send in Form 14039, Identity Theft Affidavit, which alerts the IRS of the incident.
8. Respond to IRS Notices Right Away
Be sure to respond immediately to any IRS notice you receive with the information the agency requests. Letter 488C is sent to verify your identity, and it could mean that someone tried to file a tax return under your name. Provide any information the IRS requests right away to avoid further delay in getting the issue resolved.
Practice care when you’re handling your Social Security number, financial information, and other sensitive personal details that could lead to identity theft. Tax-related identity theft is very common, and you want to do everything in your power to avoid it.
Contact Our Tax Attorneys With Identity Theft Questions
The IRS takes matters of identity theft seriously, but the agency is overwhelmed with tax returns, refunds, audits, fraud cases, and a lot more. Make sure you do what you can to protect your personal information and avoid tax-related identity theft.
Tax law is updated frequently, and you never want to miss anything that applies to your situation, whether new guidelines or credits you can take. Talk to the team at Silver Tax Group about your concerns and goals. Our attorneys know the law and its implications for your tax return.
Silver Tax Group assists with accounting, consultations, tax fraud cases, tax debt, tax litigation and defense, offers in compromise, emergency tax services, and much more. We can help you break down what’s going on in an identity theft situation and come up with the best plan to move forward. Reach out to Silver Tax Group to speak to a tax expert about tax-related identity theft.