Using a Refund Suit to Remedy Identity Theft of Return Preparer Fraud

Today, we welcome guest blogger, Robert G. Nassau.  Professor Nassau teaches at Syracuse University College of Law and directs the low income taxpayer clinic (LITC) there.  Today, he discusses twin problems that have plagued my taxpayers, identity theft and preparer fraud.  He has employed refund suits before to resolve cases in which the IRS has frozen a taxpayer’s earned income tax credit and in the post today he explains how he used a refund suit to solve a seemingly intractable identity theft/preparer fraud issue.  His pioneering and innovative use of refund suits to craft favorable results for his clients is probably what caused him to become the author of the chapter on refunds in the book “Effectively Representing Your Client before the IRS.”  The book is gearing up for its seventh edition in 2017 and Professor Nassau has signed on for another update of the refund chapter.  Keith

As all tax professionals know, tax-related identity theft and return preparer fraud are widespread, and trying to assist a victim of these crimes – despite significant procedural improvements made by the Internal Revenue Service – can make one envy Sisyphus and his Boulder Problem.  Recently, the Syracuse University College of Law Low Income Taxpayer Clinic successfully resolved one such taxpayer’s ordeal – and did it by filing a refund suit in Federal District Court.  This is his story.


The Taxpayer.

Prior to 2011, John Doe (not his real name) had traditionally prepared and filed his own tax returns, and had never had any problems.  When he was working on his 2011 return, his calculations were not leading to his accustomed refund.  When he mentioned his dilemma to a friend, she suggested that he contact Bonnie Parker (not her real name), who, according to the friend, was very knowledgeable in all things tax.  John went to Bonnie, showed her his W-2, and gave her some additional personal information.  Bonnie said she would look into it and get back to him, but she never did.  John never saw her again.  John himself did not timely file his 2011 return, because he was considering filing for bankruptcy, and thought he had three years to file the return.

The Crime Perpetrated.

Unbeknownst, at the time, to John, Bonnie submitted a fraudulent return using John’s identity and some of his legitimate information, and received a refund of about $5,000.

The Crime Discovered.

In early 2013, John realized that something was amiss, as he started to get collection notices regarding “his” 2011 tax return.  The Service had audited John’s “return” on the basis of both automated underreporting and child-based benefits.  Because the audit was ignored, John now found himself assessed close to $6,000.

The Failure of Traditional Remedies.

Having “put two and two together,” John filed his real 2011 return in the summer of 2013, claiming a refund of about $2,000.  This return was not processed.  In early 2014, John went to his local Taxpayer Assistance Center, where he was encouraged to submit an Identity Theft Affidavit (IRS Form 14039), which he did.  This did not solve the problem.  Later in 2014 he was told to submit a Tax Return Preparer Fraud or Misconduct Affidavit (IRS Form 14157-A), and a Complaint: Tax Return Preparer (IRS Form 14157).  John submitted both of these Forms.  He also filed a police report with the Syracuse Police Department.  None of this solved his problem.  In fact, while he was trying to solve his 2011 problem, his refunds for 2012 and 2013 (and, later 2014) were all offset and applied to his 2011 “debt,” reducing it to around $2,000.  In early 2015, John sought help from the Taxpayer Advocate Service, which, despite diligent efforts by his Case Advocate, was unable to fix the problem.  Apparently, the Service was confused by whether this was an Identity Theft case or a Return Preparer Fraud case.  In addition, the Service was suspicious of John and his “relationship” with Bonnie.  Ultimately, his Case Advocate suggested that he contact the Syracuse LITC.

Commencement of the Refund Suit.

Concluding that it would be fruitless to try to solve John’s problem administratively (that train had left the station and was not coming back), the Syracuse LITC decided to file a refund suit on John’s behalf in Federal District Court, which it did in November 2015.  The Complaint sought a recovery of John’s claimed refunds on his actual 2011, 2012, 2013 and 2014 returns. In our view, because each of those returns had claimed a refund; six months had passed since each return had been filed; and it was not more than two years from John’s receipt of a notice of disallowance with respect to any of his claims (there had been no such notices), the District Court had jurisdiction to hear his case.  (Section 6532(a)(1) of the Code.)

The Department of Justice Answers.

In his Answer, the attorney for the Department of Justice raised two interesting points (while denying most of the factual assertions for lack of knowledge): (1) the refunds for 2012, 2013 and 2014 had actually been granted – they had just been offset to 2011, therefore, there was no issue for those years; and (2) there might be a jurisdictional issue regarding 2011, because there was currently a balance due for 2011, and, pursuant to United States v. Flora, one cannot bring a refund suit if one still owes any part of the taxes assessed for that year.  While this first point is not without a good deal of merit, the second point creates a fascinating potential Catch-22 (fascinating from a tax law perspective, not from a solve-the-problem perspective).  If the DOJ attorney were correct, the Court would implicitly have to conclude that the fraudulent return was the real return, when the case is premised on the fact that the fraudulent return is fraudulent and the real return shows a refund (hence no Flora issue).  Effectively, if the DOJ attorney were correct, one might never get his “day in court” to prove that he was the victim of identity theft or return prepare fraud.

How It Played Out.

While reserving his Flora argument, the DOJ attorney flew to Syracuse to depose John.  Having listened to John’s story in person, and having done some independent sleuthing of his own, the DOJ attorney concluded that John was telling the truth.  He arranged to have the fraudulent 2011 return (and its liability) purged from the system, and John’s actual 2011 return respected and processed.  Interestingly, that actual 2011 return wound up showing a small liability, but it was more than offset by John’s 2012, 2013, 2014 and 2015 refunds, so he received a significant check.  It took thirteen months from the time John filed his refund suit until the time his account was rectified and he received his proper refund.

Lessons and Observations.

Given John’s – and even TAS’s – inability to solve his tax problem administratively, a refund suit seemed his best, if not only, resort.  While it took over a year to reach the correct result, the refund suit brought with it an intelligent, diligent and dedicated DOJ attorney who, to his credit, seemed more concerned with reaching the correct result than with trying to set a new jurisdictional precedent.  It also brought a Judge who seemed to believe John from the “get-go,” and who prodded the parties toward settlement.  While we would certainly recommend fully exhausting one’s administrative avenues of relief first, where those have proven unsuccessful, we would encourage taxpayers to file refund suits to get the result they deserve.


Getting a Copy of the Fraudulent Return Filed in Your Name

We wish everyone a happy holiday.  Next week will be a light week at PT as we celebrate with our families.

As ID theft became more prevalent over the past decade or so, victims seeking to address the theft ran into a stone wall at the IRS in their efforts to come to an understanding of the theft and their efforts to fix the problems it caused.  The IRS took the position, after receiving advice from its Chief Counsel interpreting the relevant sections of IRC 6103, that it could not give to victims the fraudulent return filed with their own name on it if they told the IRS that the return was not their return.  In those circumstances, the IRS interpreted the disclosure provisions of the code to prevent giving the true taxpayer, i.e., the victim, a copy of a return filed by someone else.  The IRS position could make it extremely difficult or impossible for the victim to unwind the situation since they were operating in the dark as to what caused their problem.  Practitioners who knew that the IRS would decline to give the true taxpayer a copy of the fraudulent return if they said their client was the victim of identity theft took to asking for transcripts and return copies first and then reporting the ID theft in order to circumvent this problem.

In 2011 the Chair of the ABA Tax Section asked each committee to propose a legislative fix to a problem facing their committee.  As chair of the Low Income Taxpayer Committee, on behalf of the committee I worked with others and drafted a legislative fix to 6103 that would allow the true taxpayer to see any return filed with their identifying information on the return as the person filing the return.  Like most of my ideas, this one lacked sufficient pizzazz to make it off the ground based on the initiative of just the committee recommendation; however, on May 6, 2015 a Senator wrote to the IRS expressing concern with the IRS policy of not providing returns fraudulent using the name and identifying information of a taxpayer to the victim.  In responding to this letter less than four weeks later, the IRS obtained a new opinion from Chief Counsel’s office reinterpreting section 6103 and allowing victims to obtain copies of the fraudulent returns.  It is interesting how an inquiry from the right source can influence the outcome of a legal opinion.  After changing its position, the IRS established the Fraudulent Return Request Program on November 3, 2015.

On November 8, 2016, the Treasury Inspector General for Tax Administration (TIGTA) issued a report examining the new program.  Because this issue is important to me and to my clients, I read their report with interest.


TIGTA reports provide terrific insights into IRS processes.  The reports themselves follow similar patterns and do not have a spellbinding writing style, but they convey information that those outside the IRS would otherwise miss.  For that reason almost every report written by TIGTA deserves a quick glance.  This report, in typical fashion, provides interesting data on how well the IRS has responded to the requests of victims for the fraudulent returns with their identifying information and the typical findings that the IRS has not set up the best process and has not followed the process it set up.

After reversing its legal position on its ability to provide victims with copies of fraudulent returns filed using their information, the IRS established the Fraudulent Return Request (FRR) program.  The TIGTA report stated that the IRS received more than 5,000 requests for fraudulent returns during the first year.  In order to obtain a copy of the fraudulent return, identity theft victims must snail mail a signed letter containing their name, SSN, mailing address and the tax year of the fraudulent return.  The letter must contain the statement “I declare that I am the taxpayer.”  The taxpayer must also send a copy of a government-issued ID.

A representative can also make the request for the fraudulent return.  The rep needs to sign a statement that reads “I declare that I am a person authorized to obtain the tax information requested.”  In addition the rep must submit his or her own name, TIN, mailing address and how he or she represents the victim.  Some of this seems redundant with the power of attorney (POA) form but the IRS must want to make doubly sure that the rep has this authority.

Once the IRS receives the request for the fraudulent return it has an internal time frame of 30 days to acknowledge receipt of the request and 90 days to fulfill the request or ask for more time.  The report states that the IRS will not “release a redacted copy of a tax return for any identity theft case open and still being worked.”  Since getting a copy of the fraudulent return can provide significant assistance to the victim in explaining that they are the victim, this limitation surprises me.  Once you prove that you are a victim, the need to see the fraudulent return diminishes.  I cannot understand why the IRS would adopt this policy limitation that makes it harder for victims to prove the theft.  If the IRS has decided that it can legally provide a copy of the return to the true owner of the person whose identity has been used on the return why does it matter that the IRS has declared the person a victim of identity them before it releases the information to the true owner of the identity?  The TIGTA report does not explain or question the thinking behind this position.

The report describes the process that the IRS will use if it rejects the request.  My recent interaction with the IRS identity protection unit did not leave me with a great deal of confidence in that unit.  For my client it sent a letter stating that it agreed he was the victim of identity theft and that if we had questions we should contact Ms. X.  I called Ms. X and requested a copy of an account transcript showing that the assessment was reversed.  Ms. X told me that it was not her job to provide account transcripts and that I should seek a copy elsewhere.  I pointed out to her that because of the identity theft indicators I could not use E-Services to obtain the transcript or call and wait on the phone to successfully request one.  Ms. X let me know that was not her problem and I should not be badgering her.

While thinking about how I should go about obtaining a transcript to make myself comfortable that the problem was indeed solved, my client received another bill for the tax assessed as a result of the theft of his identity.  So much for the fixing of his account.  I had a reasonably high degree of confidence that calling Ms. X again would not solve the problem so we called the general number for the identity theft unit and had a totally unsatisfactory call which was described in the recent post by Caleb Smith.  After that call we were left with no alternative but to contact the Local Taxpayer Advocate’s office.  I hate to contact the advocate’s office, not because the office is unhelpful, but because I feel that I have enough knowledge to solve problems without bothering them.  They did assist in getting the liability removed from my client’s account after which we received another letter from the identity theft unit inviting us to contact Ms. X, the extremely unhelpful employee we originally encountered, if we had any questions or concerns.  We passed on this offer of assistance but I wonder how many others Ms. X has sent down the same path to purgatory that she did with us.

In its report TIGTA found that the IRS did not meet its internal guidelines in processing requests for the fraudulent returns.  The most prevalent mistake involved redaction errors.  The IRS has a redaction protocol for the fraudulent so that the victim will not learn the name and address of the person using their identity and it did not always redact everything in the protocol.  The IRS sometimes released the return without getting a complete copy of everything it should receive in the request for the return.  To fix the problems related to insufficient requests TIGTA suggested that the IRS develop a form to make it easier for persons requesting the fraudulent returns to followed the prescribed list of items wanted by the IRS.  This suggestion makes sense although it did not seem to rise to the level of a formal recommendation requiring a response.

The second suggestion intrigues me because I recently made a similar suggestion to the Tax Court based on software suggested to me by a colleague at Harvard.  Since more than 40% of the errors identified by TIGTA were attributable to redaction errors, TIGTA suggested that the IRS automate the redaction of the documents before turning them over.  It pointed out that the IRS is testing software to redact information from Form 990.  In the Tax Court a very high percentage of the pro se cases I review when I go to the clerk’s office have unredacted information making it easy to pick up the taxpayer’s SSN.  If the redaction software works for the IRS, it should consider making it available to the Tax Court which could use it to clean up the submissions it receives and assist taxpayers who fail to redact.  This, in turn, might make the Tax Court more comfortable making its public records more publicly accessible.

The TIGTA report discussed here describes a process that might be helpful to practitioners although getting the fraudulent returns filed using your taxpayer’s identifying information may still be easier if you request the returns before alerting the IRS to the existence of identity theft.   The report focuses only on issues related to the new process of giving fraudulent returns to the victim and not to broader problems of identity theft.  Still, the report provides useful information for those whose clients suffer from the theft of their identity.

Using 20th Century Technology in a 21st Century World: IRS Stops Initiating Contact By Phone on Failure to Deposit Cases

There was a great scene from the TV show Black-ish last season when the stylish and trendy older daughter Zoey (played by Yara Shahidi) decides she has had enough of her brothers’ using her trend-setting ways as a way to get ideas on the next big thing to make money in the stock market. She decides to thwart her brothers’ plans and shun new technology; we see her sitting in a chair reading a print newspaper and making a phone call on a rotary phone. (as an aside, video of this generation of kids trying to use a rotary phone is a good way to spend a few minutes).

The antithesis of successful integration of technology for communication is the IRS. When one looks at tax administration, we see a world where the IRS for the most part operates in a 20th century model. To be sure, IRS has achieved success in getting Americans to e-file (in partnership with the private sector), but as the recent Electronic Tax Administration Advisory Committee report indicated the IRS is “mired in a manual taxpayer service delivery model that relies on interactions using people, paper and phones.” The IRS needs to change the meet the expectations of those who expect to seamlessly communicate while at the same time be sensitive to the needs of those who rely on and may in fact prefer the opportunity for a more personal way to communicate with the IRS.


The next few years will be important as the IRS tries to shift away from paper and phones and begin providing resources for real time communications with taxpayers (see NTA Objectives Report Focuses on IRS Future State: Some Thoughts on Technology, Participation and Tax Administration). This possible shift is one of the most important developments in tax administration. No doubt it has animated the National Taxpayer Advocate in her efforts to get the IRS to balance its needs for efficiency and the public’s expectation that it can communicate with its citizens in a manner similar to other business interactions with the realities that among other things there is a deep digital divide in our country. This complicates IRS measures to rely heavily on technology for all the programs it administers, especially those like refundable credits where many Americans who claim various credits do not have ready internet access.

One complicating feature that all businesses (and IRS) have come to address is the possibility that bad guys are out to get personal information that would facilitate identity theft and just plain theft. We have discussed identity theft and IRS imposter scams many times as well. In a speech earlier this year the Commissioner said that IRS would not initiate phone calls to taxpayers; that was a big deal because as TIGTA and others have reported there has been a proliferation of IRS imposter phone schemes that have separated many innocents from their money.

Well, it turned out that in some instances IRS did initiate phone calls with Americans. One area was when employers are delinquent with depositing employee income and employment taxes. IRS has been pulling back from that practice, and earlier this month in an IRS Small Business and Self-Employed Division (SB/SE) legal memorandum the Director of Collections Policy indicated that “[i]n response to the continuing threat of phone scams, phishing and identity theft, we are changing our practice of making initial contact on FTD (Failure to Deposit) Alerts by telephone.”

The memorandum provides some additional information, including some templates for letters to use and how the process should work generally:

Field contact is the preferred method of contact on assigned FTD Alerts. However, Revenue Officers retain the discretion to determine the best method of effective initial contact on a case-by-case basis. Effective immediately, all anticipated telephone initial contacts on FTD Alert taxpayers can proceed AFTER a notice is sent to the taxpayer informing them that a Revenue Officer (RO) will contact them by phone within 15- calendar days of receipt of the FTD Alert.

Parting Thoughts

It is not easy trying to administer compliance with FTD penalties, which require a real time interactive experience to prevent the possibility of cascading liabilities. It is even more difficult for an agency stuck in 20th century technology and at the same time combatting 21st century scams. I suspect in about ten years the way the IRS communicates with taxpayers in 2016 will remind us of Lily Tomlin playing Ernestine the telephone operator trying to collect an unpaid phone bill.

Summary Opinions through 12/18/15

Sorry for the technical difficulties over the last few days.   We are glad to be back up and running, and hopefully won’t have any other hosting issues in the near future.

December had a lot of really interesting tax procedure items, many of which we covered during the month, including the PATH bill.  Below is the first part of a two part Summary Opinions for December.  Included below are a recent case dealing with Section 6751(b)(1) written approval of penalties, a PLR dealing with increasing carryforward credits from closed years , an update on estate tax closing letters, reasonable cause with foundation taxes, an update on the required record doctrine, and various other interesting tax items.

  • In December, PLR 201548006 was issued regarding whether an understated business credit for a closed year could be carried forward with the correct increased amounts for an open year.  The taxpayer was a partner in a partnership and shareholder in an s-corp.  The conclusion was that the corrected credit could be carried forward based on Mennuto v. Comm’r, 56 TC 910, which had allowed the Service to recalculate credits for a closed year to ascertain the correct tax in the open year.
  • IRS has issued web guidance regarding closing letters for estate tax returns, which can be found here.  This follows the IRS indicating that closing letters will only be issued upon taxpayer request (and then every taxpayer requesting a closing letter).  My understanding from other practitioners is that the transcript request in this situation has not worked well.  And, some states will not accept this as proof the Service is done with its audit.  Many also feel it is not sufficient to direct an executor to make distributions.  Seems as those most are planning on just requesting the letters.
  • Models and moms behaving badly (allegedly).  Bar Refaeli and her mother have been arrested for tax fraud in Israel.  The Israeli taxing authority claims that Bar told her accountant that she resided outside of Israel, while she was living in homes within the country under the names of relatives.  Not model behavior.
  • The best JT (sorry Mr. Timberlake and Jason T.), Jack Townsend, has a post on his Federal Tax Procedure Blog on the recent Brinkley v. Comm’r case out of the Fifth Circuit, which discusses the shift of the burden of proof under Section 7491.
  • PMTA 2015-019 was released providing the government’s position on two identity theft situations relating to validity of returns, and then sharing the return information to the victims.  The issues were:

1. Whether the Service can treat a filed Business Masterfile return as a nullity when the return is filed using a stolen EIN without the knowledge of the EIN’s owner.

2. Whether the Service can treat a filed BMF return as a nullity when the EIN used on the return was obtained by identifying the party with a stolen name and SSN…

4. Whether the Service may disclose information about a potentially fraudulent business or filing to the business that purportedly made the filing or to the individual who signed the return or is identified as the “responsible party” when the Service suspects the “responsible party” or business has no knowledge of the filing.

And the conclusions were:

1. The Service may treat a filed BMF return as a nullity when a return is filed using a stolen EIN without the permission or knowledge of the EIN’s owner because the return is not a valid return.

2. The Service may treat a filed BMF return as a nullity when the EJN used on the return was obtained by using a stolen name for Social Security Number for the business’s responsible person. The return is not a valid return.

  • Back in 2014, SCOTUS decided Clark v. Rameker, which held that inherited IRAs were not retirement accounts under the bankruptcy code, and therefore not exempt from creditors.  In Clark, the petitioners made the claim for exemption under Section 522(b)(3)(C) of the Bankruptcy Code for the inherited retirement account, and not the state statute (WI, where petitioner resided, allowed the debtor to select either the federal exemptions or the state exemptions).  End of story for those using federal exemptions, but some states allow selection like WI between state or federal exemptions, while others have completely opted out of the federal exemptions, such as Montana.  A recent Montana case somewhat follows Clark, but based on the different Montana statute.  In In Re: Golz, the Bankruptcy Court determined that a chapter 7 debtor’s inherited IRA was not exempt from creditors.  The Montana law states:

individual retirement accounts, as defined in 26 U.S.C. 408(a), to the extent of deductible contributions made before the suit resulting in judgment was filed and the earnings on those contributions, and Roth individual retirement accounts, as defined in 26 U.S.C. 408A, to the extent of qualified contributions made before the suit resulting in judgment was filed and the earnings on those contributions.

The BR Court, relying on a November decision of the MT Supreme Court, held that an inherited IRA did not qualify based on the definition under the referenced Code section of retirement account.  I believe opt-out states cannot restrict exemption of retirement accounts beyond what is found under Section 522, but it might be possible to expand the exemption (speculation on my part).   Here, the MT statute did not broaden the definition to include inherited IRAs.

  • In August, we covered US v. Chabot, where the 3rd Circuit agreed with all other circuits in holding the required records doctrine compels bank records to be provided over Fifth Amendment challenges.  SCOTUS has declined to review the Circuit Court decision.
  • PLR 201547007 is uncool (technical legal term).   The PLR includes a TAM, which concludes reasonable cause holdings for abatement of penalties are not precedent (and perhaps not persuasive) for abating the taxable expenditure tax on private foundations under Section 4945(a)(1).  The foundation in question had assistance from lawyers and accountants in all filing and administrative requirements, and those professionals knew all relevant facts and circumstances.  The foundation apparently failed to enter into a required written agreement with a donee, and may not have “exercised expenditures responsibly” with respect to the donee.  This caused a 5% tax to be imposed, which was paid, and a request for abatement due to reasonable cause was filed.  Arguments pointing to abatement of penalties (such as Section 6651 and 6656) for reasonable cause were made.  The Service did not find this persuasive, and makes a statutory argument against allowing reasonable cause which I did not find compelling.  The TAM indicates that the penalty sections state the penalty is imposed “unless it is shown that such failure is due to reasonable cause and not due to willful neglect.”  That language is also found regarding Section 4945(a)(2), but not (1), the first tier tax on the foundation.  That same language is found, however, under Section 4962(a), which allows for abatement if the event was due to reasonable cause and not to willful neglect, and such event was corrected within a reasonable period.  Service felt that Congress did not intend abatement to apply to (a)(1), or intended a different standard to apply, because reasonable cause language was included only in (a)(2).  I would note, however, that Section 4962 applies broadly to all first tier taxes, but does specify certain taxes that it does not apply to.  Congress clearly selected certain taxes for the section not to apply, and very easily could have included (a)(1) had it intended to do so.

I’m probably devoting too much time to this PLR/TAM, but it piqued my interest. The Service also stated that the trust cannot rely on the lack of advice to perform certain acts as advice that such acts are not necessary.  I am not sure how the taxpayer would know he or she was not receiving advice if it asked the professionals to ensure all distributions were proper and all filings handled.  I can hear the responses (perhaps from Keith) that this is a difficult question, and perhaps the lawyer or accountant should be responsible.  I understand, but have a hard time getting behind the notion that a taxpayer must sue someone over missed paperwork when the system is so convoluted.  Whew, I was blowing so hard, I almost fell off my soapbox.

  • This is more B.S. than the tax shelters Jack T. is always writing about.  TaxGirl has created her list of 100 top tax twitter accounts you must follow, which can be found here. Lots of great accounts that we follow from writers we love, but PT was not listed (hence the B.S.).  It stings twice as much, as we all live within 20 miles of TaxGirl, and we sometimes contribute to Forbes, where she is now a full time writer/editor.  Thankfully, Prof. Andy Gerwal appears to be starting a twitter war against TaxGirl (or against CPAs because Kelly included so many CPAs and so few tax professors).  We have to throw our considerable backing and resources behind Andy, in what we assume will be a brutal, rude, explicit, scorched earth march to twitter supremacy.  We are excited about our first twitter feud, even if @TaxGirl doesn’t realize we are in one.
  • This doesn’t directly relate to tax procedure or policy, but it could be viewed as impacting it, and we reserved the right to write about whatever we want.  Here is a blog post on the NYT Upshot blog on how we perceive the economy, how we delude ourselves to reinforce our political allegiances (sort of like confirmation bias), and how money can change that all.

Former TAS Employee Implicated in ID Theft Refund Scheme

There are bad seeds in any organization, and IRS is not exempt from that. Despite that reality, the news release that the Northern District of Alabama US Attorney’s office issued the other day is particularly disturbing because it highlights how one of the IRS’s own allegedly was involved in using her position at the Taxpayer Advocate Service to steal taxpayer identities and use that knowledge to facilitate the receipt of over a million dollars in bogus refunds.

The US Attorney’s Office announced that it indicted former TAS employee Nakeisha Hall and co-conspirators for  “their involvement in a 2008 to 2011 scheme operated out of Birmingham that involved stealing personal identity information from the Internal Revenue Service to create fraudulent tax returns and collecting the stolen refunds.”

We have written a few times about the scourge of identity theft in the past year, with excellent guest posts on the topic from former prosecutor Justin Gelfand and practitioner Rachael Rubenstein. This story, however, is particularly disturbing because Hall abused her position of trust in a way that can seriously undermine confidence in the tax system, and in particular given her position at TAS, which has a major role in helping taxpayers resolve identity theft issues.


The news release expands on that:

Taxpayers trust, and expect, that IRS employees, as a whole, will safeguard their most sensitive personal information. Taxpayers also must trust that IRS employees in the Taxpayer Advocate Service will not only protect their sensitive information but will actively assist them when it has been compromised by others,” [US Attorney] Vance said. “An IRS taxpayer advocate who exploits that trust, and with full knowledge of the significant impacts of identity theft, uses her IRS access to compromise taxpayers’ identities and steal a million dollars from the U.S. Treasury is committing a particularly egregious crime that will not go unpunished,”  Vance said.

The release detailed the scheme:

Hall obtained individuals’ names, birth dates and Social Security numbers through unauthorized access to IRS computers. Hall used the personal identity information to prepare fraudulent income tax returns and submitted them electronically to the IRS. Hall requested that the IRS pay the refunds onto debit cards and directed that the cards be mailed to drop addresses that she controlled. Hall solicited and received drop addresses from Goodman, Coleman and other co-conspirators, who also collected the refund cards from the mail.

Hall activated the cards by using stolen identity information. She, Goodman, Coleman and other co-conspirators took the money off the debit cards at ATMs or used the cards for purchases. If the fraudulent returns generated U.S. Treasury checks rather than the requested debit cards, Hall and her co-conspirators used fraudulent endorsements in order to cash the checks. Hall compensated Goodman, Coleman and other co-conspirators by giving them a portion of the refund money, or by giving them refund cards for their own use.

Parting Thoughts

No doubt the misdeeds of an IRS employee will draw much attention, and it should. As the US Attorney notes, it is particularly egregious when someone in a position of trust violates that trust. That has an impact not only on the public, but also on the morale of the many IRS employees that day in and day out try their best to help the public.

Identity theft is a major problem that exists independent of misdeeds of a rogue IRS employee. TAS on an individual case level and on a systemic level has been and continues to be a major force for good. For example, in reports and in testimony the National Taxpayer Advocate has detailed IRS’s administrative process errors and recommended “Congress establish a timeframe for the IRS to develop a strategy and timeline for accelerating third-party information report processing and providing taxpayers with electronic access to such data.” 2105 Testimony Before the House Committee on Oversight and Government Reform.

Recent PATH legislation accelerates the timeframe for the filing of information returns and mandates a delay in the payment of refunds attributable to refundable credits, actions consistent with those recommendations and reflective of how TAS continues to be a positive force in identifying problems and proposing solutions to tax administration problems.

There is still much to do in this area. This story is depressing and to the extent there are other problems within IRS and TAS one hopes that TIGTA and prosecutors chase down all of the bad actors. The problem though goes well beyond the bad actors, and Congress and IRS still have their hands full as we enter a new filing and identity theft season as well.


8:35 AM 12/31: Note: The story was updated to reflect that the indicted person is a former TAS employee


IRS Announces Procedures for Identity Theft Victims to Request Copies of Fraudulently Filed Tax Returns

Today we welcome back guest blogger Rachael E. Rubenstein who recently joined Strasburger Attorneys at Law in San Antonio, Texas after serving as the director of the low income taxpayer clinic at St. Mary’s law school. Rachael was a principal author of the Identity Theft chapter in the 6th Edition of Effectively Representing Your Client Before the IRS.  She writes today about the recent change in IRS policy that will allow victims of identity theft to see a redacted version of the return filed by the thief using the victim’s tax identifying information.  This is a much needed change that has been a long time coming.  Keith

On November 5, 2015, the Service announced instructions and information for taxpayers to request copies of fraudulent returns filed by identity thieves using their personal information.

For several years, victims and advocates (including TAS representatives, LITC clinicians, and private practitioners) have pushed for access to these returns. However, until last week, the Service did not permit its employees to provide victims of identity theft copies of tax returns filed under their SSNs due to concerns about section 6103 disclosure violations, despite clear guidance on the topic in 2012 from Chief Counsel. In May of this year, Senator Ayotte pressed Commissioner Koskinen on this issue. He responded with a letter stating that the Service decided to change its policy regarding disclosure of fraudulent returns and would develop procedures to enable victims to request and receive copies of these returns. In August, during a congressional hearing on Tax Related Identity Theft and Fraudulent Tax Returns, representatives from TAS and TIGTA specifically testified about this policy change and their desire for the Service to move forward with its plans to grant access to fraudulent returns. Although this news was long-awaited, the Service delivered on the Commissioner’s pledge.


The announcement states that copies of the current tax year and the previous six years are available. The instructions are fairly specific in terms of what a taxpayer, or authorized representative, must include along with the request. A chart covers what return information will be visible on the copy versus redacted. For example, the names of the taxpayer, spouse, and any dependents on the return will be redacted except for the first four letters of the last name. SSNs, ITINs, and EINs will also be redacted except for the last four digits. Additionally, phone numbers and bank numbers will be redacted expect for the last four digits. The entire address will be redacted minus the street name. The names and addresses of “other persons” or entities listed on the return will be completely redacted along with the numbers associated with the tax return preparer or third party designee.

The redactions appear appropriate in light of the disclosure statute and Chief Counsel guidance, although, arguably, the restrictions may go further than required under section 6103 with respect to “other persons,” namely return preparers. The instructions indicate that a request will be returned if the address listed does not match the requestor’s IRS address of record. There are certainly instances when a victim’s IRS address of record is changed due to no fault of his own. For example, the address of record may not be correct when the Service processes an identity theft return and does not receive a paper filed return from the true owner of the SSN for the same tax year. Taxpayers whose requests are rejected due to an address mismatch will be instructed to change their address of record by filing a Form 8822, Change of Address. The request may be resubmitted after the Service processes the address change.

During the initial phase of this new program, the Service will probably take longer than the reported 90 day average to effectively process and respond to requests for copies of fraudulent returns, as the volume is unpredictable and the cases complex. Undoubtedly many requestors will experience processing holds due to open identity theft issues, and a significant number of requests will likely be returned as a result of address mismatches or failure to follow the instructions. Nonetheless, in an era of perceived dysfunction in tax administration, it’s important to acknowledge when a positive policy change occurs through multifaceted advocacy efforts.

Proposed Legislation to Combat Identity Theft and Override Loving

We have written extensively on the separate but at times related issues of identity theft and refund fraud. Last week, for example, guest poster Rachael Rubenstein wrote an update on identity theft issues; the post generated spirited comments including one by Bob Kamman essentially suggesting that lots of the blame lies with Congress and the administrations for failing to step up and provide the means necessary for the IRS to step into the 21st century, unlike Bob’s example of  tax administration powerhouse Estonia. Senate Finance staffers gobbling up our posts and comments have sprung to action, with the Senate Finance Committee scheduling an open executive session tomorrow at 10 AM to mark up a bill designed to “prevent identity theft and refund fraud.”  (link to the session is here)

My ear is not to the DC ground but the bill has the bipartisan support of the Chair, Senator Hatch, and ranking Democrat Senator Wyden. A press release announcing the mark up is here; a description of the Chair’s mark up can be found here, and a summary can be found here.

Some of the key proposals in the legislation include requiring the IRS to reduce burdens on identity theft victims. The IRS would also be required to consider and report on measures it is taking to detect and combat identity theft and also study the possibility of allowing someone to file an affidavit blocking the e-filing of returns.

I have previously discussed how thieves take advantage of the IRS look-back compliance model and how earlier matching of information returns before issuing refunds is a crucial measure that can give the Service the means to stop the outflow of funds through identifying discrepancies. Importantly, the legislation includes a number of measures to give the IRS the power to move away from that model. For example, it would push up the filing of W-2, W-3 and 1099 MISC to 15 days after the due date for payee statements, as well as require the IRS to study the possibility of moving up deadline for other information returns. The bill also facilitates the means to get the IRS off its look-back model through requiring many small businesses to transition from paper W-2 and 1099 filing to e-filing and mandates that e-prepared returns that are paper filed have a scannable code allowing the IRS to process the return information more efficiently. Moreover, as the summary describes, the bill allows the IRS to access data in the National Directory of New Hires “for the sole purpose of identifying and preventing false or fraudulent tax return filings and claims for refund.”

There is more in here too, including an increase in penalties on preparers who improperly use taxpayer information and an override of Loving by giving Treasury authority regulate all aspects of tax practice, including paid tax return preparers. It also gives IRS the authority to revoke PTINs of preparers.

This legislation has the potential to be a game changer for tax administration. While the passage of the legislation is unlikely to be a walk in Lahemma perhaps the confluence of high profile cyber thefts and apparent bipartisan support will begin to tip the scales away from those who view the tax system as an open cookie jar.






Summer Updates: Identity Theft and Tax Administration

Today, we welcome back guest blogger, Rachael E. Rubenstein.  Rachael served as the principal author in the Identity Theft chapter in the recently published 6th Edition of Effectively Representing Your Client before the IRS.  So much has been happening in this area recently that we asked Rachael to bring us up to date and she has done so with a comprehensive post on this area over the past few months.  Rachael just moved from a teaching position at St. Mary’s Law School in San Antonio, Texas where she directed the low income taxpayer clinic to the firm of Strasburger & Price, LLP in the same city.  We appreciate her willingness to write extensively while in the midst of a practice move.  Keith

Tax-related identity theft was a hot topic this summer.  Since I last blogged about it in May, the NTA released her Fiscal Year 2016 Objectives Report to Congress, alerting us to an upswing in the number of open identity theft cases in IRS inventory; a written report was released containing details of the 2015 Security Summit held by Commissioner Koskinen; Senators Johnson, Warner, and Ayotte introduced the Social Security Identity Defense Act of 2015; and the Senate Budget Committee held a hearing, convened by Senator Ayotte, on Tax-Related Identity Theft and Fraudulent Returns.


My previous post optimistically noted that after almost a decade of annual increases, the volume of IRS identity theft incidents finally declined by roughly 42 percent in 2014 compared to its peak of 1,901,105 in 2013. Considering the attention and resources focused on this problem, the marked decline in 2014 showed promise.  Unfortunately, the NTA’s June report indicates that the number of open identity theft cases impacting taxpayers in IRS inventory (as of May 2015) swelled again to near May 2013 levels—up 69 percent from May 2014.

The NTA attributes the recent rise in open identity theft cases back to levels observed in 2013 to “the overreach of the TPP [Taxpayer Protection Program] filters and understaffing of the TPP phone lines.” The TPP is responsible for detection, evaluation, and prevention of improper refunds related to identity theft. During the 2015 filing season, TPP return processing filters identified 1,558,874 potentially fraudulent returns using 196 distinct filters that flag returns when certain characteristics are identified. The false positive rate was around 34 percent, meaning that a third of electronically filed tax returns that TPP stopped from posting to a particular account were filed by legitimate taxpayers who expected timely receipt of their tax refunds. These taxpayers received a TPP notice instructing them to call a particular phone number to resolve the issue; however, most that called during the peak of tax season in February were unable to get through at all to a live phone assistor. For those that did get through, there average wait time was between 20 minutes to over an hour.

Immediately after the May 2015 data breach scandal (which turned out to affect around 250,000 more taxpayers than initially reported), we learned that earlier in the Spring, Commissioner Koskinen convened key officials from state taxing authorities and the private tax industry together for a Security Summit to discuss the significant challenges facing tax administration as a result of tax-related identity theft, and potential coordinated strategies. It was widely reported that an agreement was reached among the participants “to form a public-private partnership committed to protecting the nation’s taxpayers and the tax system from IDT [identity theft] refund fraud.” In June, a 9 page report was released detailing the goals of each of the working groups formed from the Security Summit, outlining recommendations, listing existing proposals for congressional consideration, discussing next steps, and describing the participants. This partnership is certainly an innovative approach, and it will be interesting to see how this collaboration plays out.

The Social Security Identity Defense Act was introduced in May and is aimed at amending section 6103 to make it easier for victims of identity theft and law enforcement officials to receive information pertaining to tax-related incidents of identity theft from the FBI and DOJ. Although it is unlikely to be enacted, this bill has reignited discussion regarding the intersection of identity theft and section 6103 disclosure issues. For example—to what extent is the victim taxpayer entitled to information from the Service regarding the incident? Presently, under PMTA 2012-005, Chief Counsel takes the position that once an invalid return is submitted, it becomes the return information of both the true owner of the SSN and the identity thief because the information relates to the potential investigation of liability with respect to both parties. Therefore, the victim of identity theft should have a right to a copy of the bad tax return as long as disclosure would not impair federal tax administration.

In confirmed or suspected cases of identity theft, a taxpayer’s account is marked with various types of identity theft indictors. When such an indicator is present, taxpayers and their representatives may find it difficult to obtain copies of tax returns or related tax transcripts from the Service because employees are trained to safeguard taxpayer information protected by section 6103. Disclosure violations carry the threat of civil fines and even potential criminal charges. Despite Chief Counsel guidance indicting that the bad return is the return information of both the victim and the alleged identity thief, the IRM “instructs employees to not  to provide . . . copies of tax returns when identity theft indicators are present on the requestor’s account.” In May of 2015, Senator Ayotte wrote a letter to Commissioner Koskinen expressing her concern “with IRS’s refusal to provide tax identity theft victims with copies of the fraudulent returns filed in their names.” She referenced the 2012 Chief Counsel memorandum to support her complaint and request for the Service to change its non-disclosure practices. Commissioner Koskinen acquiescence in a written response issued later the same month and stated that the Service would develop procedures to allow victims of identity theft to request and receive (redacted) copies of tax returns filed under their SSNs.

The hearing held in August covered familiar and fairly bleak territory as well as some encouraging announcements about major programmatic changes regarding identity theft cases processing. A taxpayer testified about the bureaucratic nightmare she endured dealing with IRS and other agencies when her e-filed return was rejected because her deceased child’s SSN was used to file multiple fraudulent returns (it is worth noting that none of the fraudulent filings actually got passed IRS filters). Christopher Lee, TAS Senior Attorney Advisor; J. Russel George, TIGTA; and Commissioner Koskinen testified about the general state of refund-related identity theft—the broad consensus was that despite its many gains in terms of detection and prevention of refund-related identity theft, the Service still has a long way to go in order to get ahead of the overall identity theft crisis.

In addition to the jump in the number of incidents during the 2015 filing season, and the TPP false positive rate, lengthy delays in case processing and poor customer service are stubborn problems (although the situation is certainly not as bad as it once was in the early part of the decade). A study conducted by TAS of cases closed in 2014 found that 179 days was the average resolution time for an identity theft case from a taxpayer’s perspective. The Service’s slow progress towards improvement of case processing times is partly attributable to the increasing complexity of identity theft cases. Such cases require the involvement of multiple functions under the Service’s decentralized case management structure, which has been in operation for several years. The same 2014 TAS study found that approximately 30 percent of cases involve multiple issues.

TAS has repeatedly called for the Service to set-up “a sole point of contact system” for victims with complex identity theft cases. While the Service has announced its final phase of a plan to re-engineer its approach to victim assistance, moving towards a more centralized model, the prospects for adoption of this particular TAS recommendation appear dim. Commissioner Koskinen’s version of a “single point of contact” described during the hearing involves yet another specialized toll free phone line, as opposed to the TAS model of one designated employee to handle a particular victim’s case.

The Commissioner’s testimony reminded stakeholders that sophisticated cyber criminals present momentous challenges to the Service in an era of archaic IRS technological systems and strained financial resources. Still, he pledged that the Service is continuing to work diligently on efforts to combat identity theft, and he announced some specific plans for 2015-2016. One is the roll out of the Identity Theft Assistance organization, a consolidation of various identity theft programs into one division aimed at unifying the Service’s victim assistance and identity theft compliance activities. Another is an improved case resolution average of 120 days. Further, new protections for electronic filing, developed by the Security Summit working groups, were promised before the 2016 filing season.

The Service requested additional money for improved cyber security and revamped identity theft initiatives, which is reflected in the President’s FY 2016 Budget pending before congress. All tax administrators who testified at the hearing agree that the IRS needs more funding to address the identity theft epidemic. They also share the view that congress should take a more active role in enacting various legislative tools to assist the IRS in combating this pervasive problem.