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How The IRS Knows You Are Really You

pile of tax documents with a computer mouse, coffee mug and pen on top

The words “identity theft” are enough to strike fear into any taxpayer’s heart. But what actually happens when the Internal Revenue Service needs to make sure you are really you?

I have personally encountered this situation twice in my work as a tax professional. The first instance was probably more similar to the situation most people picture when they think of tax fraud. My client’s identity was stolen in a security breach at his workplace. He, like many of his colleagues, had a fraudulent return filed in his name. My client filed an identity theft affidavit, and the IRS then sent him a PIN to use on any future filings. (Larry Elkin went through the same process and wrote about it in this space last year.)

There was an additional wrinkle for this client. His kids also received notices of their own from the IRS. They were instructed to go to the government’s IDVerify website (no longer available), which asked a series of questions designed to be answerable only by the person in question. The queries were about things that are typically found on a person’s credit report, such as the amount of an auto loan or mortgage payment or the details of a previous address. There was just one problem: My client’s children were minors, who usually don’t have a credit profile.

Given their dates of birth, the site would not process their submissions. We needed to verify their identity because tax refunds were involved. The kids had to file tax returns to report investment income they received. Even if your kids don’t have to file their own tax returns, you might still need to go through the process of verifying their identities, because it is not uncommon for scammers to try to claim an exemption for nonexistent children on a tax return to beef up a fraudulent claim for a refund. Eventually, my client had to visit an IRS office with birth certificates and other documents to prove his children were, indeed, real.

All this was annoying, but it was also fairly straightforward. A more recent incident illuminates the potential aggravation waiting for some unlucky taxpayers who have no reason to suspect their identities have been compromised.

A client who I’ll call Jane recently received a 4883C letter from the IRS informing her that the Service had received her 2015 return, but that it could not be processed until she completed additional steps to verify her identity. We didn’t know what triggered this request – and still don’t, for that matter – but it is likely related to the IRS’ pledged crackdown on identity theft this year.

The letter noted that if the taxpayer chose to have an authorized power of attorney represent her, she was still “encouraged” to be present on the phone call. She was also instructed to have her current tax return and its supporting documents available, as well as her previous year’s tax return, before she called.

Jane, who is elderly, is not deeply knowledgeable about her taxes. She leaves many of her financial affairs in our hands and has granted me power of attorney to represent her before the IRS. So, documents at the ready, I gave the IRS a call. There is, thankfully, a dedicated number to call for these matters, so my wait time was – unusually – only about 10 minutes.

The agent with whom I spoke at first was, to put it mildly, less than polite. She insisted that, power of attorney or not, I could not speak or answer questions on Jane’s behalf, despite the fact that the IRS’ own correspondence seemed to contradict her statements. At first, she was reluctant even to wait while I got Jane on the phone, but I convinced her not to simply disconnect me. However, once Jane was on the line, the agent remained aggressive and forbade me from speaking at all. I made the choice to end the call, because I knew that if Jane failed the phone screening, she would be required to visit an IRS office in person, which would have been a major inconvenience.

Our second attempt went more smoothly, but still proved a draining experience. This agent, who was much more patient than his colleague, asked Jane a set of questions in order to verify her identity. The questions included things like the street she lived on at a certain date, selected from a multiple-choice list.

Some of these questions, however, proved challenging. For instance, one concerned the company that serviced a mortgage of hers eight years prior. For Jane, this was both a relatively long time ago and pertained to a matter she never really handled directly. Her late husband handled the finances before he became ill, and then we took over bill payment responsibilities. I would be surprised if she were the only taxpayer who ran into such trouble because either a deceased spouse or a financial professional handled such matters. Other questions included identifying companies where she maintained bank accounts and homeowners insurance policy providers.

Jane was exasperated by questions such as how long she had resided at her current address. In a very natural reaction, she audibly called out to her personal assistant to ask her about this information. The agent sharply warned Jane that asking for help could invalidate the entire process. As Jane became understandably frustrated, I suggested that the agent offer her ranges of years to select among, rather than looking for a specific date of residency. This satisfied the agent’s criteria and made it possible for Jane to answer.

I was also glad I was on the call when the agent began asking questions about Jane’s tax returns. Though she had the forms in hand, such questions are not always straightforward for a layperson. A sample of some of the questions the agent asked were whether she had made estimated tax payments, what her itemized deductions and her adjusted gross income were for the prior year, and whether the majority of her income was from earnings or passive income. These were questions that any tax professional worth their salt could answer, but which could be quite challenging for someone who does not deal with taxes often or who delegates the task to someone else.

Noticing that Jane was having trouble answering, I asked whether the agent could rephrase his questions when asking for information. I suggested that when he asked for a particular piece of information, such as Jane’s adjusted gross income, that he also identify the line number on the tax return where Jane could find the information. Once the agent took that approach, things went much more smoothly.

After about 30 minutes of questioning, the IRS agent was finally satisfied that Jane’s 2015 return really did belong to Jane. We were told that if we had not heard anything further about the return in nine weeks, we should call the main IRS number to follow up. With luck, that won’t be necessary.

The IRS reported earlier this month that its efforts to reduce identity theft are beginning to pay off. Nearly 50 percent fewer fraudulent returns made it to processing this year than last; the Service reported that it stopped nearly 800,000 bogus returns before they entered the processing system in the first nine months of 2016.

Overall, this is a positive change. But that increased security also comes at a time when the IRS’ budget has been slashed, meaning that there were periods when the Taxpayer Protection Program line – the one Jane and I called in response to her letter – was severely understaffed for weeks on end. I can’t help but suspect that the first agent’s attitude was probably informed by pressure to get through as many calls as possible, and possibly also by the training cuts that have affected the agency. Thankfully, the second agent was flexible enough to adjust the process in a way that still maintained its integrity, while recognizing that Jane, like many taxpayers, may lack technical knowledge of the tax code.

The IRS, in its attempt to shut down very real problems with taxpayer fraud, has put a stressful burden on taxpayers, especially older ones who are both targets for fraudsters and prone to find the process hard to complete successfully without assistance. We tax professionals need to prepare our clients and ourselves to deal with the new reality at the IRS. And all of us may want to keep a list of former addresses handy.

Senior Client Service Manager ReKeithen Miller, who is based in our Atlanta office, is the co-author of Chapter 14, “State Income Taxes” in our firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. He also contributed to the firm’s book The High Achiever’s Guide To Wealth.

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