Earlier this year, the U.S. Federal Trade Commission (FTC) reported there was an almost 50% jump in identity theft complaints in 2015. The primary driver of that spike, by far, was tax identity theft. The FTC received 490,220 complaints about identity theft last year, with tax identity theft accounting for 221,854 of the complaints.
Individual Tax Identity Theft
To date, most of the attention has been paid to individual victims of tax identity theft. According to the IRS, it occurs when someone uses a stolen social security number (SSN) to file a tax return claiming a fraudulent refund. The victim may be unaware of this until he or she attempts to file a return and learns that one has already been filed. Alternatively, the IRS might send a taxpayer a letter saying it has identified a suspicious return with the taxpayer’s SSN.
In addition, a fraudster might use another’s SSN to obtain a job. The employer then reports that person’s income to the IRS under the stolen SSN. The victim, obviously, won’t include those earnings when filing his or her tax return, so IRS records will indicate that the victim underreported income.
Tax identity theft is a top concern for the IRS. The agency will be implementing new provisions and is working with states and the payroll industry to put new safeguards in practice.
Most notably for employers, the Protecting Americans from Tax Hikes (PATH) Act signed in late 2015 now requires employers to file W-2, W-3 and 1099 forms by January 31 of the year following the tax year. The idea is that it will be easier for the IRS to catch discrepancies between legitimate forms filed by employers and those filed by fraudsters seeking refunds based on false forms.
The earlier deadline takes effect for forms filed in 2017 for the 2016 tax year. With these forms now due to be filed with the IRS a month earlier than in the past (or, for electronic filers, two months earlier), employers will need to pull together the necessary information more promptly.
Risks for Businesses
Thieves are going after employer identification numbers (EINs), which is a startling proposition for the many businesses that put far more effort into protecting SSNs than their EINs. A fraudster could use a stolen EIN to report false income and withholding on a W-2 and file for a refund. Moreover, the legitimate business could find the IRS coming after it for payroll taxes that were reported as withheld but not remitted.
As with SSN theft, EIN theft victims may not discover something’s amiss until they file their tax returns and receive IRS notification that they had already filed for that tax year. They also might be tipped off by receipt of an IRS notice regarding nonexistent employees.
Tips for Preventing Tax Identity Theft
Businesses should bear in mind — and remind their employees and customers — that the IRS does not initiate contact with taxpayers by email, text messages or social media to request personal or financial information.
For additional guidance on this topic, read our blog “Tax Identity Fraud Still Major Concern.”
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