Death, taxes and identity theft

If meeting its dreaded April 15 deadline isn't stressful enough, the IRS now is warning us about tax-related identity theft. The Internal Revenue Service's most recent annual list of scams of concern to taxpayers puts Internet "phishing" schemes — in which people are tricked into revealing confidential financial data — in the No. 1 spot.

If meeting its dreaded April 15 deadline isn’t stressful enough, the IRS now is warning us about tax-related identity theft. The Internal Revenue Service’s most recent annual list of scams of concern to taxpayers puts Internet “phishing” schemes — in which people are tricked into revealing confidential financial data — in the No. 1 spot.

As a trusted financial advisory professional, you need to let your clients know that tax time is absolutely prime time for identity theft. Tax documents filed electronically to the IRS are a gold mine for hackers. They contain Social Security numbers, addresses and other vital financial information.

Identity theft has become one of the “most serious problems” that taxpayers face, Nina Olson, the IRS national taxpayer advocate, said in a recent report to Congress.

Among the major problems that can arise from identity theft are delays or denial of refunds, the report said. Taxpayers also could face “the assessment of tax debts resulting from income” reported on a fraudulent return, according to Ms. Olson, who works independently within the IRS.

The IRS said that taxpayers this year had forwarded to the agency 33,000 phishing-scam e-mails reflecting 1,500 different schemes. It reported that thieves, some claiming to be IRS officials, use information to empty unsuspecting victims’ bank accounts, run up credit card charges or apply for loans in the victims’ names.

Ms. Olson, who two weeks ago testified at a Ways and Means subcommittee hearing on this subject, applauded the IRS for taking proactive measures to assist victims, including the recent implementation of a tracking system for identity-theft victims’ accounts. But she said the IRS still lacks a coordinated approach and has a “duty to restore integrity to accounts.”

IRS officials say they have made key strides to combat the problem. But the agency “has not done enough to improve identity theft procedures for victims of identity theft or to secure its filing system from fraudulent filers,” Ms. Olson wrote in her report to Congress.

Each year, employers and financial institutions send W-2 and 1099 forms, along with other tax documents, to both the taxpayer and the IRS. The IRS matches all these forms to individuals by their respective Social Security numbers. These numbers are key because they allow the matching of forms to people.

Therein lies the dilemma. If someone is fraudulently working under someone else’s Social Security number, all documentation is matched to the legitimate tax documents. Therefore, both actual income and the income of the scam artist will be reported as the income of the fraud victim.

If there is any positive to this mess it’s that dealing with a tax ID theft may take your mind off of the alternative minimum tax.

Meanwhile, if any of your clients believe that they are a victim of tax-related identity theft or if they are tied up in IRS red tape, urge them to contact the IRS Taxpayer Advocate Service ( irs.gov/advocate).

Jim Pavia is editor of InvestmentNews.