Ever Present: Tax Identity Theft Scams

Although the IRS took successful steps to reduce tax-related identity theft in 2017, the agency warns taxpayers to stay alert about tax identity crime. Because, even though the traditional tax season is months away, for cyber criminals, busy season is year round. It's important for taxpayers to stay informed. Here are some useful tips on how to avoid tax identity theft.

What is tax-related identity theft?

First, some basic information defining tax related cyber crimes. According to the IRS, tax-related identity theft generally occurs when a thief uses a stolen Social Security number (SSN) to file a tax return claiming a fraudulent refund. The victim is typically unaware until he or she attempts to file a tax return and finds that one has already been filed for that SSN. Alternatively, the taxpayer might discover the theft upon receipt of a letter from the IRS saying it has identified a suspicious return that uses the taxpayer’s SSN.

Scam artists have devised a variety of methods to obtain the information they need to file a tax return under another person’s SSN. During the past several years, the IRS, the Federal Trade Commission (FTC) and many state tax agencies have issued warnings as new methods come to the forefront.

How does tax-related identity theft occur?

Fraudulent returns are just one of many ways taxpayers are victimized. As the saying goes, “you’re only limited by your imagination”. Here are some typical scenarios:

Phone schemes. The IRS, within 10 days after April 18, 2018, highlighted a new phone scam perpetrated by these scam artists who program their computers to display the phone number of the local IRS Taxpayer Assistance Center (TAC) on the taxpayer’s Caller ID. If the taxpayer questions the legitimacy of the caller’s demand for a tax payment, the caller directs him or her to IRS.gov to verify the local TAC phone number.

You can guess what happens next. The caller states the need for a payment typically via a debit card, which allows them to directly access the victim’s bank account.

In another phone scheme, the criminals claim they’re calling from the IRS to verify tax return information. They tell taxpayers that the agency has received their returns and that they simply need to confirm a few details to process them. The taxpayers are prompted to provide personal information such as an SSN and/or bank or credit card numbers.

Digital schemes. Emails that appear to be from the IRS are part of phishing schemes intended to trick the recipients into revealing sensitive information that can be used to steal their identities. The emails may seek information related to refunds, filing status, transcript orders or PIN information.

The scammers have become creative on this approach, too. The emails might seem to come from an individual’s tax preparer and request information needed for an IRS filing. The information request could even come via a text message. Whether by text or email, the communication states that “you are to update your IRS e-file immediately” and includes a link to a fake website that mirrors the official IRS site. Once there, the individual is asked to provide information that gives the thieves all they need. Emails might also include links that cause the recipients to download malware that infects their computers and tracks their keystrokes or allows access to files stored on their computers which can lead to ransomware.

Do businesses need to worry?

Absolutely — businesses have also been targeted by criminals intent on victimizing their employees or the businesses themselves.

For several years now, criminals have employed different spoofing techniques known as business email compromise (BEC) or business email spoofing (BES). They disguise an email to an individual in a company’s human resources or payroll department so it seems to have come from an executive within the company. The email requests a list of all employees and their Forms W-2 — information that can be used to file returns in the employees’ names.

Scammers also are pursuing businesses’ Employer Identification Numbers (EINs). They then report false income and withholding and file for a refund in the companies’ names. Even worse for the companies, the IRS could go after them for payroll taxes reported as withheld but not remitted.

The IRS recently announced that it has seen a sharp increase in the number of fraudulent filings of certain business tax forms, including Schedule K-1 and those filed by corporations and partnerships. As a result, the IRS may ask businesses for additional information (such as the driver’s license numbers of owners) to help identify suspicious tax returns.

How does the IRS contact taxpayers?

The IRS has made it clear that it will not:

  • Threaten to bring in law enforcement to have someone arrested for nonpayment of taxes,
  • Revoke a driver’s license, business license or immigration status for nonpayment,
  • Demand a specific payment method, such as a prepaid debit card, gift card or wire transfer,
  • Request a debit or credit card number over the phone,
  • Demand the payment of taxes without the opportunity to question or appeal the amount owed (the IRS usually mails a bill when a taxpayer owes taxes),
  • Send unsolicited emails, texts or messages through social media channels suggesting taxpayers have refunds or need to update their accounts, or
  • Request any sensitive information online.

The IRS will call or visit a home or business in only very limited circumstances. It might do so, for example, if a taxpayer has a severely overdue tax bill, to secure an employment tax payment, or to tour a business as part of an audit or a criminal investigation. Yet, even in those special situations, the IRS generally will first send several notices by mail. What can victims and targets do?

If you know or suspect you’ve fallen prey to tax-related identity theft, you’ll need to file IRS Form 14039, “Identity Theft Affidavit.” The IRS and FTC recently announced a joint project that allows people to report such theft to the IRS online through the FTC’s IdentityTheft.gov website. Remember, though, that filing the affidavit doesn’t eliminate the need to pay your taxes.

In addition, the FTC advises victims of all types of identity theft to file a complaint on its website and contact one of the three major credit bureaus (TransUnion, Experian and Equifax) to place a fraud alert on their credit records. You also should contact your financial institutions and close any financial or credit accounts opened or tampered with by identity thieves. If you received, but didn’t fall for, a scam email, you should still report it. The IRS urges individuals who receive unsolicited emails purporting to come from the IRS to forward the messages to phishing@irs.gov before deleting.

Stay alert

Don’t make the mistake of letting your guard down because tax season has yet to begin. If you receive a suspicious communication allegedly from the IRS or other taxing authority, please contact us for confirmation of its validity and advice on how to proceed.

About the Author(s)

Paul Lewis, JD joined HBK in 2017, in the Tax Advisory Group and works in the firm’s Blue Bell, Pennsylvania office. Paul earned a Bachelor of Science in International Business from Franciscan University of Steubenville, Ohio and a Juris Doctor from Temple University in Philadelphia, Pennsylvania, where he also completed a Business Law Certification. He currently is pursuing and expects to complete an LL.M. in Taxation.

Paul has experience in tax law working at a Low Income Taxpayer Clinic with Community Legal Services - a Philadelphia non-profit, and V.I.T.A. the volunteer income tax assistance program of the Taxpayer Advocate Service – an independent organization within the IRS. In addition, Paul has experience in insurance litigation at White and Williams LLP and Wealth and Fiduciary Planning services at Wilmington Trust Company.

Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.