Better Identity Theft Efforts – S. 2736

Businessman in suit and handcuffs

On 7/31/14, Senators Wyden and Hatch proposed a comprehensive identity theft bill to reduce identity theft related to federal tax filings. This addresses a serious issue. Individuals should not have to worry that federal tax filings may lead to theft and costly use of their tax identification number. While tax reform bills have also included provisions to lessen identity theft, such proposals should not have to wait for a full tax reform bill to be enacted (which will likely take until at least 2016).  The IRS has also ramped up its efforts to reduce identify theft, but needs more assistance.

S. 2736, Tax Refund Theft Prevention Act of 2014, includes new rules for the following areas:

Sec. 2. Safe harbor for de minimis errors on information returns and payee statements – basically, no need to correct such a form if the error is $25 or less. Apparently, the goal it to reduce unnecessary filings, all of which increases the possibility of identity theft.

Sec. 3. Internet platform for Form 1099 filings.

Sec. 4. Requirement that electronically prepared paper returns include scannable code.

Sec. 5. Single point of contact for identity theft victims.

Sec. 6. Criminal penalty for misappropriating taxpayer identity in connection with tax fraud – up to $250,000 or 5 years in prison or both.

Sec. 7. Extend Internal Revenue Service authority to require truncated social security numbers on Form W-2 – modifies 6051(a)(2) by replacing “his social security number” with “an identifying number for the employee.”

Sec. 8. Improvement in access to information in the National Directory of New Hires for tax administration purposes.

Sec. 9. Password system for prevention of identity theft tax fraud – calls upon Treasury to create a program where any individual may elect to obtain a “unique password” to include on his/her return. So, if a return with your social security number is filed, but without the password, it is not processed.

Sec. 10. Increased penalty for improper disclosure or use of information by preparers of returns.

Sec. 11. Increase electronic filing of returns.

Sec. 12. Increased real-time filing.

Sec. 13. Limitation on multiple individual income tax refunds to the same account.

Sec. 14. Identity verification required under due diligence rules – modifies the penalty under §6695(g) by adding at the end: “Such due diligence requirements shall include a requirement that such preparer verify (in such manner and with such documentation as the Secretary shall provide) the identity of the taxpayer with respect to such return or claim for refund.” This is the penalty that requires return preparer to take extra verifications when the return includes the EIT.

Sec. 15. Report on refund fraud – due from the IRS one year after enactment.

Per Senator Hatch’s press release of 7/31/14:

“Tax refund fraud is a one-two punch for taxpaying individuals,” Hatch said. “Millions of taxpayers’ identities are compromised, and all taxpayers have their tax dollars wasted.  Our bill aims to address such fraud by enhancing the IRS’s capabilities in detecting fraud and by giving victims the assistance and safeguards they need to repair the damage done by tax theft criminals.  In order to further deter this crime, we make tax refund fraud a specific category of a felony offense and enhance security features for filers.  Hard-working American families deserve a government that protects both their tax dollars and their sensitive taxpayer information.”

“We have to better protect lawful taxpayers from this nightmare issue,” Wyden said.  “Earlier this year, I made it clear that taxpayer consumer protection must be at the heart of improving the American tax system.  This bill offers a comprehensive, common sense solution to a growing problem that will help prevent fraud and also provide assistance to those who have been victimized.”

one-page summary of the bill from Senators Wyden and Hatch was also released.

What do you think?

Original Post By:  Annette Nellen

Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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