By Chris Meeks, CPA, Tax Manager
This past January, the IRS announced that all individuals will now be able to request an identity protection PIN (IP PIN) to use on future tax returns. The IP PIN is a personal identification number the IRS issues to you every year to be certain it is you filing your return and not a fraudster trying to claim a fraudulent refund. Tax professionals agree it is a good idea to opt into the program, as this is a proactive approach to avoid becoming a victim of refund fraud. Previously, only those taxpayers who had confirmed cases of identity theft could request an IP PIN when filing tax returns.
In fact, the IRS has been issuing IP PINs since 2011 to identity theft victims to combat identity theft refund fraud.1 The solution is simple: the IRS will not accept a taxpayer’s tax return without the IP PIN. Even if a fraudster steals a copy of a victim’s previous tax return (with the IP PIN listed on it), they still wouldn’t be able to fraudulently file a subsequent return, as the IP PIN changes every year.
So why allow all taxpayers to obtain an IP PIN now? As you may have heard, identity theft has been an ongoing problem for years. In 2015, the IRS started a pilot program in a few states that allowed taxpayers to voluntarily opt-in to receiving an IP PIN.1 Operational improvements made by the IRS are usually the result of recommendations made by the Treasury Inspector General for Tax Administration (TIGDA’s) Office. In late 2018, TIGDA finally made their recommendation to the IRS to begin issuing IP PINs to all taxpayers, not just those who were not the victim of identity theft.2
According to the U.S. Department of Justice, stolen identity refund fraud is often committed by large criminal enterprises with perpetrators at all levels of the scheme.3 They begin by stealing social security numbers, addresses and other personally identifiable information. Once they gather this information, they have some people file the fraudulent tax returns with the IRS while others facilitate receiving the refunds.
Identities can be stolen just about anywhere, including workplaces, nursing homes, hospitals and even public death lists.3 Really, anyone with a social security number is vulnerable. Fraudsters have also figured out that they had a better chance of success at obtaining these fraudulent refunds if they file the false tax returns early in the tax season, before the victims have had the chance to file. The perpetrators often have the refunds electronically transferred to debit cards or delivered to addresses where they can obtain a check from the mail before the victim realizes that someone has already filed a return under their name.
Only a few years ago, a fraudster could submit a fraudulent tax return with as little as a name, social security number and a matching address.4 This has become a bit more difficult lately. Over the past couple of years, the IRS has strengthened their defenses by questioning millions of tax returns that either don’t normally have tax overpayments refunded or returns that simply look different than those filed in previous years for the same taxpayer. After the IRS flags one of these tax returns as questionable, the taxpayer listed on the return is forced to contact the IRS to verify their identity before a refund is issued. This is an example of recommendations put forth by a private-public sector partnership called the 2015 Security Summit.4
The efforts of the 2015 Security Summit are working. For example, there were 1.4 million confirmed identity theft returns filed in 2015 and 883,000 in 2016, according to the IRS. By 2017, this number had dropped down to 597,000—a 57% decline over this two-year period. Quite an improvement in just a short amount of time.4
As a result of the IRS becoming more offensive and proactive in their approach to fight identity theft refund fraud, cybercriminals are getting more sophisticated as well. According to IRS, these thieves are realizing they need more detailed financial data to file a more realistic-looking return that can avoid the IRS’s detection radar.4 To do this, they are targeting CPA firms, human resources departments and other places that hold sensitive financial information. In fact, the IRS has seen several schemes where fraudsters are attempting to gain taxpayer W-2 information from both employers and tax professionals, which is rather alarming.4
Financial advisory firms and tax professionals must do their part to ensure their clients’ data is kept safe. One question you must ask any financial professional or firm you entrust to hold sensitive personal information is whether they have an information technology professional on staff to ensure safeguards are in place to protect against cyber security issues. Firms without safeguards in place are always easy targets for cyber criminals, as hackers can easily access their networks and do so without being noticed. Layers of security can slow down cyber criminals so that a breach can be detected before it becomes lethal. Exencial Wealth Advisors has a team of IT professionals on staff to ensure vigorous and overlapping safeguards are in place to defend against cyber-attacks. Additional layers of security are also placed in service on a regular basis. Exencial’s financial and tax professionals are also trained regularly on best practices to ensure our clients’ data is protected.
Since identity theft fraud is still an on-going battle, it is a good idea to obtain an IP PIN, especially if you suspect that any of your personal information may have been compromised, be it through a data leak or other alert from any service provider that has become a victim of a cybercrime.1
You may opt in by using the “Get an IP PIN” tool through the IRS’s website, by mailing or faxing Form 15227, Application for an Identity Protection Personal Identification Number (IP PIN), or by visiting an IRS Taxpayer Assistance Center in person.5 You can also contact your tax professional for assistance. Spouses and dependents are also eligible for the program. Keep in mind that you must pass a rigorous identity verification process to request an IP PIN.5
- JournalofAccountancy.com (11/3/21) – Journal of accountancy: time to opt in for and IP PIN? By Sebastian B. Murolo, CPA, MBA, CMB
- Treasury.Gov/TIGTA (10/27/21) – Treasury Inspector General for tax administration: results of the 2018 filing season, reference number: 2019-40-013
- Justice/Gov (11/1/21) – The United States Department of Justice: stolen identity refund fraud
- IRS.Gov (10/28/21) – Internal Revenue Service news release (IR-2018-21): Key IRS identity theft indicators continue dramatic decline in 2017; Security Summit marks 2017 progress against identity theft.
- IRS.Gov (11/12/21) – Get an identity protection PIN (IP PIN)
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