Identity theft and related-tax scams have always proven to be troublesome for tax authorities. To counter these scams as much as possible, the Internal Revenue Service (IRS) initiates certain preventative measures every year. These measures are part of the Security Summit Initiative between the IRS, state authorities and financial sector under the ‘Taxes. Security. Together’ effort.
According to IRS Commissioner John Koskinen, the identity theft measures taken for the year 2016 under this effort have been so successful that it has led to a drop in faulty returns, fake refund claims, and identity theft victims. This can be verified by the of number of ‘Identity theft affidavits’ (affidavits filed with the IRS by taxpayers claiming they were victims of identity theft) filed in 2016. The number of affidavits filed has dropped 50% (affidavits filed from January, 2015 to September, 2015 were 512,278; while affidavits filed during the same months in 2016 were just 237,750).
Additionally, Koskinen also reported that the IRS stopped 787,000 fake tax returns in the first 9 months of 2016, resulting in the IRS saving more than $4 billion in fraudulent refund claims. This was down from 1.2 million tax returns claiming more than $7.2 billion during the same period in 2015.
Due to this unprecedented success, the IRS along with its security summit partners has prepared the Identity theft initiatives for 2017.
IRS Identity Theft Measures for 2017
Basically the ‘Security Summit’ for 2017 will consist of seven work groups instead of three work groups for 2016.
These work groups are:
- Authentication Work Group,
- Communication and Taxpayer Awareness Work Group,
- Financial Services Work Group,
- Information Sharing Work Group,
- Information Sharing and Analysis Center Work Group (ISAC),
- Tax Professionals Work Group, and
- Strategic Threat Assessment and Response (STAR) Work Group.
Each of these work groups will individually carry out the measure tasks that they have been directed to conduct.
Some of the measures we will see in 2017 include:
- In 2016, a pilot program was initiated adding verification codes to approximately 2 million IRS Form W-2. This pilot will be expanded to over 50 million W2’s filed in 2017. This verification code will be a 16-digit alphanumeric code that the taxpayer and/or the tax return preparer will enter into the payroll software product when prompted to do so. This measure will prevent tax fraudsters from using fake Forms W-2 to file false returns and claim refunds.
- Enhanced authentication of tax return preparers and transmitters using Electronic Filing Identification Numbers (EFINs).
- A filing season guide will be issued to tax professionals to help locate information regarding returns filed with a preparer EFIN or PTIN, and its significance in detecting potential identity theft.
- New data elements will be identified from individual tax returns to improve authentication of the taxpayer and identify possible identity theft scams. These elements will be in addition to the 20 elements identified for 2016. Data elements from corporate tax returns will also be shared to prevent business identity theft.
- Evaluate these data elements from electronic returns and work with industry and state partners to test the proposed data elements.
- Outreach programs and education campaigns will be conducted under the “Taxes. Security. Together” program to spread awareness amongst U.S. taxpayers and tax return preparers on protecting themselves from cyberattacks, identity thefts, tax scams, and also to safeguard taxpayer data.
- Financial industry will identify state tax refunds that appear fraudulent under the IRS External Leads Program, and return them to states for validation and review before depositing them.
- Expand the definition of Ultimate Bank Account (UBA) to include all refund transfer products, including gift and pre-paid cards, paper checks and direct deposit. This will ensure that refunds go into valid accounts, since UBAs help identify actual owners of the account.
- Expansion of real-time communications between pre-paid card industry, States and the IRS to block accounts associated with fraud.
- Improved documentation and reporting processes, including enhancing analysis of leads to provide more meaningful communication to state and industry partners. The improved communication may provide alerts on filing patterns and other questionable filing activity which will boost efforts to reduce identity theft refund fraud among all partners.
- Confirmed identity theft account information will be provided to the industry and states at the beginning of the tax season so that Summit partners can analyze the information and update their internal fraud and processing filters.
- A new Identity Theft Tax Refund Fraud Information Sharing & Analysis Center (IDTTRF-ISAC) will launch in 2017. The center will allow for significant gains in detecting and preventing identity theft refund fraud and will provide better data to law enforcement to investigate and prosecute identity thieves.
- Tax industry participants will begin implementation of the National Institute of Standards and Technology (NIST) Cybersecurity Framework. Future assessment criteria, cyber-threat assessment, best cyber-security practices, and compliance options will be determined and shared through continued education and outreach.
For 2017, the emphasis remains on authentication of legitimate tax filers, information sharing and cyber-security. Most activities also will be invisible to taxpayers but will be extremely helpful to Summit partners in detecting and preventing identity theft returns and fraudulent refunds. It is likely that the 2017 initiatives will prove to be a bigger success than 2016 given that the work is segregated between 7 groups and more streamlined than before.
To avoid becoming a victim of tax identity theft, taxpayers should always avoid sharing their SSN, ITIN, and other confidential information without being informed about the reason for the information request. Also, the taxpayer should protect their financial information, verify their credit report every 12 months and avoid disclosing any information related to taxes or finances over the phone as the person requesting such information could be an identity thief.
For more details on tax scams, identity theft and IRS measures, please refer to our other articles.
The IRS Warns: Beware of Summertime Tax Scams
Tax Scams: Beware of Substitute IRS Form 1040
Safety Tips to Maintain Security While Carrying Out Online Transactions
IRS Letter 5071C
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