Fighting Tax Identity Theft

Our tax filing systems are not perfect!  How does the IRS or a state tax agency really know if the person filing a return is the true owner of the taxpayer identification number used? In IRS Publication 1345, on procedures for authorized e-file providers, the IRS states that if the preparer/e-filer does not know the client, they should get two forms of verification (ideally picture IDs that include the client's name and address (page 11 of Pub 1345)).  That should help. What else is needed?

Perhaps all taxpayers need a PIN like they have for their ATM cards, debit cards, and bank websites. That should help as a person would not be able to file without both the SSN and the PIN. What about for paper returns? The IRS could hold up processing until they match the W-2 with one provided by an employer. Or will some type of biometric identification be needed in the near future?

Here is some information on recent security protocols of the IRS:

• IRS, How New Security Safeguards Will Affect You For 2017
• Melanie Lauridsen, AICPA Insights, ID Theft: Two Prevention "Hassles" Worth Your Time, 1/19/17

What do you think?

New tax filing security protocols

New Security Step – IR-2016-124 (9/22/16) – The IRS alerted people filing an extended return electronically for 2015 (due 10/17/16), that they likely would be asked to enter their AGI for 2014. The purpose is to help properly identify the taxpayer. The information release reminds people how to order a tax transcript from the IRS should they not have it.

Some states are using a similar system where they might ask for a driver’s license number or other identifying data that a thief might not have (although a thief might easily get someone’s driver’s license, such as because it is on their checks and cancelled checks were thrown out in the trash).

The Alabama Department of Revenue has a few programs to improve security and reduce identity theft. For example, taxpayers may register for a service where they are notified if a return is filed with their Social Security Number. The DOR also has a protection program that begins with the “ID confirmation quiz.” The state also highlights its programs in the Form 40 instruction booklet (although few people likely read this).

What more do you think the IRS and state tax agencies should do to protect the very sensitive information they have?