This crime occurs when a criminal uses your personal information to file a fraudulent income tax return and steal your refund. Given the process of electronic filing, this has become an easy way for criminals to make millions.
All they need is your full name and social security number. At that point, they put together a fraudulent return making sure to max out the refundable credits and have the refund deposited into an account they can access.
The IRS used to send out statistics on this problem, but stopped because the numbers became so large that it was stopping people from electronic filing. The last thing the Service wants to do is be forced to pay someone to put your return into their system so that it can be checked. As such, they stopped publishing the statistics.
But the last published numbers put identity theft of individual taxpayers for returns processed through the Kansas City Service Center at just above 5%. Given the millions of returns they process annually, that’s a staggering number.
The National Taxpayer Advocate sent their annual report to Congress last week. The Service has established an Identity Theft Victim Program, and individual cases handled by this portion of the IRS have increased almost three-fold since 2019.
When this crime occurs we need to put together a bunch of information that ends up being the size of the Old Testament and send it in to convince the IRS that you are who you are, and that they should process your return and provide a refund. The congressional report from the Taxpayer Advocate said that it’s now taking an average of 19 months for these forms to be processed.
Yes. That’s correct. If this happens to you, you’ll wait 19 months for your refund.
Let me leave you with this.
If you’re one of my clients or a long-term reader, you know that I’m not a fan of electronic filing. Identity theft is just one of the reasons for this stance. What’s the easiest way to not become a victim of this crime?
Invest In A $.67 Cent Stamp
In the last thirty years that I’ve practiced, I’ve never had a client who mailed in a return become a victim of identity theft. If that isn’t enough of a reason, try the next one on for size.
Choosing An Audit Target
The way they choose audit targets on business returns is by taking similar businesses in a similar geographic area and comparing them. They do this by using your Business industry Classification Number and your zip code.
So let’s say that we have two similar businesses in the same zip code. They file their returns.
One entrepreneur takes a deduction for meals equal to 1% of their income. The other takes a deduction of 10% for meals.
The 10% deduction red flags because everyone else in the same business who are geographically close only take the 1% deduction. The return is then sent to an IRS Employee who needs to make a decision. Those choices are…
1 – Let it pass. Maybe the income on the return was so low that the deduction isn’t unreasonable.
2 – They do a Line Item Audit where the taxpayer must prove that the deduction was reasonable by sending in cancelled checks, credit card receipts, etc.
3 – They send out an auditor to audit the return.
That’s how the system works. It’s an electronic process. This may sound like a ridiculously simplistic statement, but the easiest way to not get audited in these United States is to invest in a $.67 cent stamp.
A lot of the time when you mail in a return, they don’t have the manpower to put the return into the system so that it can be checked. The only reason they began allowing electronic filing in the first place was so they didn’t have to pay someone to do this simple task.
Its certainly true that if you’re a paid preparer who does more than ten returns in a year, as I am, you are required to electronically file the returns. But with every IRS Rule there’s an exception. If the client signs a form directing you to paper file, then you are relieved of the electronic filing requirement.. My clients simply sign the form.
And I haven’t had one of my returns audited at the Federal Level in 12 years. Think about it.
As always, if you want us to electronically file your return, we’ll be happy to do so. But you should understand the risks prior to doing so.
We’re all going to get through this. Let’s get through it together.
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Chris Amundson
President
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