Apr 28, 2010

Identity Theft and Taxes- It happens to 1.2 million of us - and the IRS has no power to stop it- here is how you can!

In 2007, over 1.2 million "employees" had someone else using their Social Security Number. Identity theft cases at the IRS Taxpayer Advocates Office increased 93% from 2008 to 2009.

But that is not the worst of it.

If your identity is being stolen for employment purposes, the IRS cannot stop it (keep reading to see what you can do about it!). The IRS cannot notify the legitimate owner of the Social Security Number that he or she may be the victim of identity theft and take steps to address employment-related identity theft issues. So the misery lives on for the person whose SSN was stolen.

The reason that the IRS cannot notify the owner is due to very strict disclosure laws put on the IRS in identifying taxpayer information to third parties.

In addition, the IRS does not have sufficient enforcement resources to address most of these cases and it would not be worthwhile to pursue employment-related identity theft cases for unreported tax liabilities because, according to IRS officials, the taxes owed on most of these cases are not significant.

Tell that to the person who annually is struggling with their identity being stolen and having to worry about the IRS saying their tax return is incorrect. Here is what can and likely does happen to those who are victim of employment-related ID theft: When you do not report all of your Forms W-2 or 1099 income on your tax return, the IRS issues you a CP 2000 - Notice of Income Underreporting and proceeds to access you additional taxes. Those who have prior ID theft and have reported and proven it to the IRS have a "ID Theft" indicator on their account which may avoid additional inquiry into their account by the IRS. Those who do not have this ID Theft Indicator incur the wrath of an IRS inquiry or even an audit.

But here is Congress to the rescue.

In an effort to get through the IRS disclosure rules, Congress is proposing legislation that will allow the IRS to contact a victim of ID Theft if it arises in an IRS investigation.

Now let's be practical:

- the IRS is under-resourced in this area- it appears that the Taxpayer Advocate is the preferred route of many, and with ID Theft growing at 93%- it will soon be overwhelmed
- the victim of the ID theft usually brings the allegation forward - and after the damage has been done; if the IRS is to be proactively effective in ID Theft, it should implement procedures to notify individuals on wage and income statement irregularities before the damage is done

Now, here is what you can do about it-

If you believe you are a victim of employment related ID Theft or just want to check, you can do this just after you file your tax return on April 15th each year.

Here's how:

Each year the IRS keeps all of your Wage and Income information on a document called an "IRP". The IRP for all of your previous year's information on wages and other tax transactions reported under your SSN. You can get a copy of this by calling the IRS at 1-800-829-1040 and asking the representative to send it to you. It is normally available for the previous year around Memorial Day (i.e. 2009 wage and income statements are available to you around June 1, 2010).

When you get the Wage and Income statement, look at it closely for someone else using your SSN for employment purposes. The wage and income statement will have the name of the employer or payor and their address and employer identification number. You can use this to track down the employer and let them know that they have an employee that is using your SSN!!

By taking these actions, you can stop the cycle. The best news in this approach is that it is free. You will just need to do the detective work with the use of IRS documents.

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