Fraud and the IRS

While we’re all still smarting from paying taxes, it’s tough to hear that the IRS is having more fraud problems.  The Treasury Inspector General is complaining that the IRS still hasn’t addressed enforcement issues  in the whistle blower program that were discovered in 2009.  The issues are not small, ranging from poor controls in safeguarding data, poor processing and lack of timeliness in addressing tax fraud. One example is that IRS employees aren’t required to note the date of a claim.  Needless to say that’s pretty critical in terms of tax payments.  Tax payers who don’t file timely have to pay stiff penalties.  The IRS also recently won in Tax Court on the issue of being able to take any refunds due to offset taxes owed from prior periods.   Why not apply some of their own standards to themselves?

On a happier note, in light of concerns about government employees not behaving in exemplary fashion when they’re out of the office, the IRS has reportedly nixed out of town training conferences.  While more training is clearly needed, it sounds like it is simple enough to be done inside the Beltway. 

The other fraud problem that refuses to go away, is the ongoing issue of taxpayer identity theft.  Someone who has stolen your social security number files a tax return in your name that gives them a refund. The IRS only finds out that it wasn’t really you is when you file the legitimate tax return.  Needless to say untangling the ensuing mess is horrible.   The service is reportedly putting more resources against this problem, but they are not winning the battle.  A key fact to remember is that the IRS only uses snail mail to send notices.  You will never hear about a legitimate audit, refund or data request form the IRS via e-mail.  The service also doesn’t use social media sites.

1099 More Ways to Have Tax Troubles

While most of my conversations about taxes at this point have to do with getting information about the return itself, an article in the Wall Street Journal reminded me of a change to returns this year that has big implications.  As indicated in this blog before, the IRS is falling ever deeper in love with third party reporting, and they are getting more serious about making sure it gets done.  The Service did back off on some of the more heinous aspects of making business owners reconcile the reporting they are getting from credit card companies (otherwise known as form 1099K).  Still, the reporting will be used to audit small businesses that accept payments via credit and debit cards.  What also hasn’t gone away is that if you pay for services with a credit card, and then have to issue a 1099, you need to subtract out what you put on the credit card.  Your vendor is already getting that income reported from the merchant bank that processed the transaction. Giving the IRS opportunity to double count income isn’t the best way to build business relationships.

This brings me to the matter of the 1099 Miscellaneous.

 

If you file taxes using a Schedule C, Schedule E, Form 1065 or Form 1120S there’s a question you have to answer for the first time this year asking if you did business with anyone who should have received a form 1099.  That would be anyone who you paid $600 or more to provide a service and they’re not incorporated.  Answer this question incorrectly, and if you get audited, you will face penalties, even though the form 1099 that you send has nothing to do with your gross income.  So your tax liability could be correct to the penny and you could still be in trouble with the IRS.  (Just when you thought you understood how bad this tax season was going to be!)  And the bad news doesn’t stop there.  Let me quote from the article.

In 2010 Congress stiffened the penalties on taxpayers who neglect to provide 1099 forms. The higher penalties took effect in 2011, and now the penalty for nonfiling is $100 per violation—$200, in most cases, because two forms are due, one to the IRS and one to the provider. The penalty for "intentional failure to file" is $250.

It’s a hassle to file these forms, as I know from personal experience filling them out.  However, this is a way for the government to raise more revenue without raising taxes.  That’s another way of saying it is a sure recipe for increased government action. 

Be Careful Out There

Each year the IRS releases its list of most common tax fraud schemes.  The theory is if they show you how unoriginal your tax cheating idea is, you won’t be tempted to try it.  Unfortunately the most common scams actually don’t involve cheating by the taxpayer – they involve fraud that hurts taxpayers. 

The first issue is identity theft.  Someone files a tax return in your name with fraudulent information that nets the criminal a refund.  When the IRS cracks the fraud on the return, they go after the innocent taxpayer who didn’t even know there was a problem.  The IRS says they have active cases against 105 people now in 23 states that involve about $1.4 billion dollars.  The IRS tries to give people a heads up when they get more than one tax return from the same person or if they find wages from an employer who isn’t on the taxpayer’s tax return.  The problem is growing so fast, the IRS has a web page set up to talk about how to handle it if you think you’re a victim.

Next on the list is a practice that I’ve encountered, and warned about previously.  Despite years of warnings, it’s still flourishing.  We had a client who got one of these e-mails last week.  Someone e-mails you telling you the IRS or EFTPS (the website where you file payroll taxes among other things) and says you have a problem and need to contact them right away.  Here’s the IRS advice on this topic.

If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.

It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information.  This includes any type of electronic communication, such as text messages and social media channels.  The IRS has information that can help you protect yourself from email scams.

Last, on the list of top scams that don’t involve active tax payer cheating is a fraudulent preparer.  Needless to say this is a topic that makes me more than a little emotional.  In fact I think it deserves a separate post.  In the meantime I’m going to make sure I’ve shredded any documents I have with someone’s social security number on it.

TIP = Tax Identity Protection

I recently did a post on avoiding identity theft when e-filing your tax return, but apparently I underestimated the risks associated with taxes and identity theft.  The General Accounting Office has issued a new report on the topic of Taxes and Identity Theft, and it’s not fun reading.  (OK I’ll admit it’s not a high potential topic for fun – but this is even worse than it seems.)  The report says it happens frequently and the IRS is ill prepared to deal with it.  That means, unwinding the case of mistaken identity will be particularly difficult with the IRS.  Yikes!

Apparently based on constituent complaints, Senator Bill Nelson from Florida (a place with lots of credit card fraud, at least when I lived there) held hearings on what the IRS is doing about the problem.  According to the government’s Taxpayer Advocate, they are trying.  The IRS now has a system that marks the returns associated with identity theft.  The idea is to let customer service reps know this is a special case.  Unfortunately, based on the testimony of the victims at the hearing, the improvements haven’t begun to solve their issues. Even the person brought in to talk about the positive side of the IRS work in this area told Congress the agency is “struggling to effectively manage identity theft cases.”  If that’s the rose colored glasses view, I’m getting nervous.

Police Chief Magazine has an article on protecting yourself from this problem. (After reading accounting journals one has to find some more exciting publications to peruse.)  Their advice is:

• Make sure you keep tax related documents in a safe place.  In particular they recommend guarding W-2s and 1099 forms.  Also, don’t leave these items in a brief case or car.
• Shred paperwork associated with your tax return that you don’t need. 
• Password protect tax related files on your computer. 
• Be careful when selecting someone to help you with tax preparation.  (Yes!)
• Use direct deposit for your refund checks. 

Last but not least, beware of IRS phsishing scams.  These tend to be successful because people get so anxious about being contacted by the IRS, they drop their guard.  The IRS does not initiate taxpayer communications through e-mail.  (It’s snail mail only. )  They also don’t conduct business via e-mail.

Last year alone the IRS identified 245,000 tax return related identity theft “incidents”.  It’s worth some hassle now, to avoid the problem.