IRS Special Edition Tax Tip 2012-12

We thought this IRS tax tip was worth sharing with our blog audience...

Top Tips Every Taxpayer Should Know about Identity Theft

Identity theft often starts outside of the tax administration system when someone’s personal information is unfortunately stolen or lost. Identity thieves may then use a taxpayer’s identity to fraudulently file a tax return and claim a refund. In other cases, the identity thief uses the taxpayer’s personal information in order to get a job. The legitimate taxpayer may be unaware that anything has happened until they file their return later in the filing season and it is discovered that two returns have been filed using the same Social Security number.

Here are the top 13 things the IRS wants you to know about identity theft so you can avoid becoming the victim of an identity thief.

1. The IRS does not initiate contact with taxpayers by email to request personal or financial information. The IRS does not send emails stating you are being electronically audited or that you are getting a refund.

2. If you receive a scam e-mail claiming to be from the IRS, forward it to the IRS at phishing@irs.gov.

3. Identity thieves get your personal information by many different means, including:

* Stealing your wallet or purse
* Posing as someone who needs information about you through a phone call or
e-mail
* Looking through your trash for personal information
* Accessing information you provide to an unsecured Internet site.

4. If you discover a website that claims to be the IRS but does not begin with ‘www.irs.gov,’ forward that link to the IRS at phishing@irs.gov.

5. To learn how to identify a secure website, visit the Federal Trade Commission at www.onguardonline.gov/tools/recognize-secure-site-using-ssl.aspx.

6. If your Social Security number is stolen, another individual may use it to get a job. That person’s employer may report income earned by them to the IRS using your Social Security number, thus making it appear that you did not report all of your income on your tax return. When this occurs, you should contact the IRS to show that the income is not yours. Your record will be updated to reflect only your information. You will also be asked to submit substantiating documentation to authenticate yourself. That information will be used to minimize this occurrence in future years.

7. Your identity may have been stolen if a letter from the IRS indicates more than one tax return was filed for you or the letter states you received wages from an employer you don’t know. If you receive such a letter from the IRS, leading you to believe your identity has been stolen, respond immediately to the name, address or phone number on the IRS notice.

8. If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost wallet, questionable credit card activity, or credit report, you need to provide the IRS with proof of your identity. You should submit a copy of your valid government-issued identification – such as a Social Security card, driver’s license, or passport – along with a copy of a police report and/or a completed IRS Form 14039, Identity Theft Affidavit, which should be faxed to the IRS at 978-684-4542. Please be sure to write clearly. As an option, you can also contact the IRS Identity Protection Specialized Unit, toll-free at 800-908-4490. You should also follow FTC guidance for reporting identity theft at www.ftc.gov/idtheft.

9. Show your Social Security card to your employer when you start a job or to your financial institution for tax reporting purposes. Do not routinely carry your card or other documents that display your Social Security number.

10. For more information about identity theft – including information about how to report identity theft, phishing and related fraudulent activity – visit the IRS Identity Theft and Your Tax Records Page, which you can find by searching “Identity Theft” on the IRS.gov home page.

11. IRS impersonation schemes flourish during tax season and can take the form of e-mail, phone websites, even tweets. Scammers may also use a phone or fax to reach their victims. If you receive a paper letter or notice via mail claiming to be the IRS but you suspect it is a scam, contact the IRS at http://www.irs.gov/contact/index.html to determine if it is a legitimate IRS notice or letter. If it is a legitimate IRS notice or letter, reply if needed. If the caller or party that sent the paper letter is not legitimate, contact the Treasury Inspector General for Tax Administration at 1-800-366-4484. You may also fax the notice/letter you received, plus any related or supporting information, to TIGTA. Note that this is not a toll-free FAX number 1-202-927-7018.

12. While preparing your tax return for electronic filing, make sure to use a strong password to protect the data file. Once your return has been e-filed, burn the file to a CD or flash drive and remove the personal information from your hard drive. Store the CD or flash drive in a safe place, such as a lock box or safe. If working with an accountant, you should ask them what measures they take to protect your information.

13. If you have information about the identity thief that impacted your personal information negatively, file an online complaint with the Internet Crime Complaint Center (IC3) at www.ic3.gov. The IC3 gives victims of cyber crime a convenient and easy-to-use reporting mechanism that alerts authorities of suspected criminal or civil violations. IC3 sends every complaint to one or more law enforcement or regulatory agencies that have jurisdiction over the matter.


Links:
•FS-2012-07, Protect Yourself from Identity Theft
•FS-2012-08, Taxpayer Guide to Identity Theft

What To Do if You Receive an IRS Notice by Carolyn Flaherty

Accounting news has been reporting an increase in audits of high income taxpayers. In fact, I have personally seen an increase in the number of IRS notices that my clients have been receiving. If you receive an IRS Notice the most important thing to remember is DO NOT PANIC.

As was illustrated in last weeks’ blog, there are many reasons why you could be receiving a notice that do not include an actual deficiency. As the IRS becomes increasingly automated, the number of erroneous notices also increase. For example, last week a client received a notice claiming that retirement income of $3,349 was not included on their return. In fact, the $3,349 was a direct rollover that WAS reported on the return in a “rounded” amount of $3,350. Although a human being looking at the return would have matched the income up properly, the automated systems did not.

After you’ve slowed your heart rate and avoided the initial shock of receiving a notice, read the entire notice with particular attention to the stated deficiency and the due date of your response. Occasionally a taxpayer misplaces a tax form or receives it after their return is prepared and therefore there is indeed income missing from their tax return. Again, do not panic. In this case, you may owe additional taxes, but an honest mistake will not get you thrown into tax court or jail!

Also note that the IRS does not correspond via e-mail. Identity thefts frequently attempt to obtain personal information by posing as the IRS. Do not respond to e-mail that appear to be from the IRS.

Contact your tax advisor. I have a client that for years, upon receiving a notice would simply pay the amount shown; until the day he received a notice that claimed a $10,000 amount due. That day he came directly to my office, and in fact the notice was erroneous and there was no amount due. He was very glad he came to us. For years his feeling was that he didn’t want to “mess with the IRS.” However, you should not simply pay without understanding the notice. Therefore, contact your advisor so that they can review your return and properly advise you.

React promptly. As humans when we are intimidated by a situation or overwhelmed by it; we tend to put off action. Instead, take notice of the date your response is due and promptly contact an advisor.

Draft a letter of Response. Whether your tax position or the IRS position is correct; a letter of response should be drafted. Your advisor will typically draft the letter for you, but you will need to review and sign the letter. The letter should include a reference to the Notice number, an explanation of why you agree or disagree with the IRS findings, your conclusion, and a list of enclosed documents.

Be crystal clear. Include all documents that support your position even if the IRS should already have copies of the information. Using the example of the IRS asserting that retirement income was not reported: I would include a copy of the Form 1099R and a copy of Page 1 of the Form 1040. In the letter I would reference the specific line item on page 1 that the income is reported on. A sample letter is included at the end of this blog.

Consider requesting an abatement of penalties. If you find that the IRS position is correct, you will be required to pay the deficiency and interest due. However, if the deficiency is due to an honest error, you may explain the error and request abatement of the penalties. My experience has shown the IRS to be responsive to such requests. A sample request is included at the end of this blog.

Fill out the response form. The IRS provides a response form to fill out. If you have questions, your advisor can assist you. The form must be completed in full and signed by you.

Assemble your package. Before the due date of your response, gather (1) Your response letter (2) the IRS response form (3) the source documents that support your position. If you have determined that you owe a payment, the payment should also be included. The IRS provides addressed envelopes for your response. Mail the package certified mail, return receipt requested.

Unfortunately, IRS notices are becoming increasingly common. Therefore, take a deep breath and follow these above steps should it become necessary.

SAMPLE RESPONSE LETTER:

John Smith
Taxpayer Way
Boston, MA 00000
January 19, 2012


Department of Treasury
Internal Revenue Service
Ref. Notice # XX0000 dated January 3, 2012
Form 1040 Tax Year 2010

To whom it may concern:

Notice XX0000 dated January 3, 2012 identified $3,349 of retirement income from Local Bank Co. as not being included on the 2010 Form 1040. As shown in the copy of Page One of 2010 Form 1040 enclosed, Line 15a reflects a $3,350 IRA distribution which represents the Local Bank Co. income as appropriate. The IRA distribution was a direct rollover as reflected on the Form 1099-R as a Box 7 Code G “direct rollover,” (1099-R also enclosed). Therefore, there should be no adjustment to the 2010 tax return.

Also enclosed for your reference is the signed Response Form.

Thank you,
John Smith

SAMPLE WITH REQUEST TO ABATE PENALTIES:

John Smith
Taxpayer Way
Boston, MA 00000
January 19, 2012


Department of Treasury
Internal Revenue Service
Ref. Notice # XX0000 dated January 3, 2012
Form 1040 Tax Year 2010

To whom it may concern:

We agree with the changes made in Notice XXX0000 dated January 3, 2012. Although we are not in possession of the 1099 in question we did receive interest income from Local Bank Co. during the tax year. Therefore we concede that the additional tax is properly due. We feel that it is likely a result of the relocation of our primary residence during the 2010 tax year that the 1099 was misplaced or never received and therefore not provided to our tax preparer. As such, we respectfully request that the penalty of $100 be abated.

Enclosed is payment of $1000 which represents payment in full of the additional tax levied and the associated interest. We have also enclosed the signed Response Form.

Thank you.
John Smith

THE IRS IS NOT ADEQUATELY FUNDED TO SERVE TAXPAYERS AND COLLECT TAXES posted by Carolyn Flaherty

As a subscriber to the IRS newswire, I receive bulletins and updates regularly. I thought this one was worth sharing with our followers because as members of the industry we have seen signs of all of these trends. That Congress is being made aware of these issues hopefully indicates that progress is forthcoming. Below are excerpts from Issue Number: IR-2012-6.

Workload Overload. The sharp increase in the IRS’s workload is due to several factors, including the increasing complexity of the tax code and the code’s frequent changes, the need to provide service to an increasingly diverse taxpayer population, the IRS’s increasing responsibility for administering economic and social policies, a surge in refund fraud and tax-related identity theft, and the implementation of new third-party information reporting requirements.

There were approximately 4,430 changes to the tax code from 2001 through 2010, an average of more than one a day, including an estimated 579 changes in 2010 alone. The IRS must explain each new provision to taxpayers, write computer code so it can process returns affected by the provision, and train its auditors to identify improper claims.

In addition, the report says, an expansion of refundable credits in recent years – including the First-Time Homebuyer Credit, the Making Work Pay credit, the American Opportunity tax credit, the health care premium tax credit, the adoption tax credit, and the Additional Child Tax Credit – has helped spawn an increase in illegal activity.... In 2011, the IRS’s Electronic Fraud Detection System (EFDS) flagged 1,054,704 returns on suspicion of fraud, an increase of 72 percent over 2010. Meanwhile, the IRS’s centralized Identity Protection Specialized Unit (IPSU) received more than 226,000 identity theft-related cases, an increase of 20 percent over 2010.

Shortcut Taxpayer Rights: “Non-Audits,” IRS Math Errors, Lack of Notice, and Delays. To keep up with its rising workload, the IRS is increasingly relying on automated data-matching procedures to identify potentially inaccurate claims and adjust tax liabilities. However, automated processes are inherently imperfect, so the taxpayer’s return position often turns out to be correct.

In addition 78% percent of IRS Audits were completed by correspondence in a highly automated campus setting where no single IRS employee was responsible for the audit, making it more difficult for the taxpayer to communicate with the IRS about his or her case.


Substantial Delays to Receive Large Refunds. Among taxpayers who sought assistance from TAS after their refunds were withheld on a suspicion of fraud, 75 percent received relief. These taxpayers had to wait an average of nearly six months overall to receive their refunds. The average refund amount was $5,600, a significant sum for most households. Thus, these delays can create significant financial hardships.

Taxpayer Service Concerns: Delays and Non-Responses to Taxpayer Inquiries. Two key indicators of taxpayer service are the IRS’s ability to answer taxpayer telephone calls and the IRS’s ability to respond to taxpayer correspondence. From FY 2004 to FY 2011, the percentage of calls that the IRS answered from taxpayers seeking to speak with a telephone assistor dropped from 87 percent to 70 percent.

Over the same period, the IRS’s ability to timely process taxpayer correspondence also declined. Comparing the final week of FY 2004 with the final week of FY 2011, the backlog of correspondence in the tax adjustments inventory jumped by 158 percent (from 357,151 to 920,768), and the percentage of correspondence in this inventory classified as “over-age” (i.e., 45 days or older, with issues that have not been resolved) increased by 309 percent (from 11.5 percent to 47.0 percent of correspondence).

To read this issue in it's entirety visit www.irs.gov.
Related Items:
•Executive Summary: 2011 Annual Report to Congress
•Complete Report: 2011 Annual Report to Congress

What to do if your business systems have been hacked - Adapted by Carolyn Flaherty

The December 2011 edition of The PPC Accounting and Auditing Update published a list of guidelines to follow if your business is hacked. The following list is based on that publication:

Don’t turn off the Internet connection or detach the affected computer from your network as doing so can erase evidence that will help investigators to determine what information was stolen and where the information was sent.

Contact both local law enforcement and a forensic investigations company. Experts should be employed to find the software used to hack your system and determine what type of information the program was trying to steal from your systems.

Let professionals assess the extent of the breach. Do not assume that because the infected computer has been cleaned up or removed that the attack is over. Assess all computers and systems to ensure that the breach has not spread.

Document your reaction to the breach and record every time someone has access to a compromised computer or server. Proper response to a security breach is essential for your legal protection.

Forty-six states have passed laws regarding reporting requirements when there is a potential that records have been exposed to a possible data breach. In addition, the federal Department of Health and Human Services has their own such reporting requirements. Therefore, you must determine whether or not your breach warrants disclosure to your customers and employees and if so, what information you are required to disclose.