Warning Signs of Client Identity Theft-Based Tax Fraud – Tutorial
Warning Signs of Client Identity Theft-Based Tax Fraud: Overview
In this lesson, we’ll look at some warning signs of client identity theft-based tax fraud. Because tax professionals are on the ‘front lines’ of tax administration, practitioners must become adept at recognizing the early warning signs of client identity theft-based tax fraud. It is very important to keep in mind that, when fraud is identified quickly, damages resulting from the fraud may often be mitigated. When fraud goes unnoticed, criminals are often able to do much more damage.
IRS Publication 5199 provides practitioners with several examples of warning signs of client identity theft-based tax fraud. The indicators of identity theft are often different for individual clients than for business clients. Let’s look at the three warning signs shown in Publication 5199 that an individual’s Social Security number has been compromised.
Warning Signs of Client Identity Theft-Based Tax Fraud: A picture of IRS Publication 5199 (Rev. 1-2016). Source: IRS.
Warning Signs of Client Identity Theft-Based Tax Fraud: Warning Signs for Individuals
First, if an individual client’s tax return is rejected, it could be a sign of identity theft. When a tax return is rejected, the IRS provides a “reject code” which indicates the reason for the rejection. Several reject codes used by the IRS indicate problems with a taxpayer’s Social Security number. For example, reject code ‘IND-508’ will be generated in cases where a Social Security number listed on a tax return has already been listed on another joint tax return that has already been processed. When a taxpayer’s individual return is rejected, his or her practitioner is often able to help identify a problem with a Social Security number.
Second, if an individual client receives notices from the IRS related to a completed tax return, it may be an indication of identity theft-based tax fraud. For example, if a client receives a notice from the IRS stating that his or her refund is being held pending an examination, and the client has already received a refund, it may be a sign that another return has been filed using the client’s Social Security number.
Third, if a client receives a notice from the IRS that refers to wages from an employer that is unknown to the client, it is often an indicator that another person has fraudulently used the client’s Social Security number to obtain employment. Keep in mind that practitioners will only be able to seek help from the IRS on a client’s behalf if the practitioner has filed the proper power of attorney with the IRS. See the instructions for IRS Form 2848 for more information.
Warning Signs of Client Identity Theft-Based Tax Fraud: Warning Signs for Businesses
For practitioners who serve business clients, the signs of tax fraud are often different. IRS Publication 5199 gives examples of three occurrences which indicate that a business client may have been the victim of fraud.
First, if a business client’s tax return is accepted as an amended return, but the client has not yet filed a return for the year, it is often an indication of fraud. Second, when a business client receives notices from the Internal Revenue Service relating to employees that the client is unaware of, it is usually a sign of tax fraud. Third, if a business client receives notices from the IRS related to a closed, dormant, or defunct business (when all account balances related to the business have been paid), that can be an indication that tax fraud has occurred.
Warning Signs of Client Identity Theft-Based Tax Fraud: More Information
This information about warning signs of client identity theft-based tax fraud is from our “Data Protection” CPE course for CPAs, Enrolled Agents and other tax return preparers. This course offers two CPE credit hours in the CPE subject category of “Taxation.” This course contains video lessons, PDF instructional materials, PDF review materials, and PDF testing materials. It also complies with the standards for interactive self-study as defined by NASBA and AICPA. You can visit this link to check CPE eligibility for your state.
To take the course, subscribe to one of our CPE online learning packages. Students who want to purchase courses separately can buy an individual course subscription for $50 for one year. You can find subscription information in the product page for the individual course at this link.
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