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    TAX: Legal Issues Arising from Tax-Related Identity Theft

    Posted by Lee P. Dunham on Mon, Mar 6, 2017 @ 16:03 PM

    The Lawletter Vol 42 No 2

    Lee Dunham, Senior Attorney, National Legal Research Group

         Tax-related identity theft occurs when someone uses a taxpayer's stolen Social Security number to file a fraudulent refund. Often, the taxpayer is not aware of the identity theft until he or she files a valid tax return and is notified by the Internal Revenue Service ("IRS") that multiple returns have been filed in his or her name. Its incidence, like that of other forms of identity theft, has increased in recent years due to hacking and phishing scams that have enabled cybercriminals to obtain far-reaching access to taxpayers' personal data, including Social Security numbers.

         The schemes of the criminal defendants described in United States v. Philidor, 717 F.3d 883 (11th Cir. 2013), and United States v. Gonzalez, No. 13 CR 154 RWS, 2014 WL 316984, at *2 (S.D.N.Y. Jan. 27, 2014), are illustrative of the nature and scope of the problem.

         In Philidor, Alland Philidor and his brother Willman Philidor each pled guilty to one count of conspiracy to steal government funds, in violation of 18 U.S.C. § 371, and one count of theft of government funds, in violation of 18 U.S.C. § 641, for their participation in a scheme that involved submitting fraudulent tax returns to the IRS using stolen Social Security numbers, receiving refund checks from the federal government, and depositing these proceeds in various bank accounts of corporate entities controlled by them. 717 F.3d at 884. The presentence investigation reports indicated that there were thousands of victims whose Social Security numbers were fraudulently used. Id.

         In Gonzalez, the court described a "typical" refund fraud scheme, in which participants "employed stolen Social Security numbers (SSNs) assigned to residents of Puerto Rico and filed fraudulent federal tax returns seeking tax refunds on behalf of those individuals." 2014 WL 316984, at *2. The court noted that the participants in the scheme targeted Puerto Rico residents, as such individuals "often do not file tax returns with the . . . IRS . . . because such filing is not required as long as all of the residents' income is derived from Puerto Rican sources," thus minimizing the risk that a legitimate return would have already been filed by the identity theft victim. Participants in the scheme obtained the federal tax refund checks either by "causing them to be mailed . . . to addresses to which the participants have access" and cashing the checks through fraudulent means, or by "caus[ing] tax refunds to be directly deposited into bank accounts controlled by them." Id. The returns were filed electronically through an Electronic Filing Identification Number ("EFIN"), which is a number issued by the IRS to electronic return originators such as TurboTax and H&R Block. Id.

         Defendant Jilfredo Gonzalez had not only participated in such a scheme himself, but had instructed multiple co-conspirators on how to do the same, selling them EFINs, installing tax filing software on their computers, and assisting them in setting up bank accounts to receive the electronic deposits. Id. Clearly, this type of identity theft is "big business."

         A number of bills have been introduced in Congress in recent years with the intent to combat tax-related identity theft.

          A bipartisan bill, H.R. 439, was introduced in the House on January 11, 2017, by Rep. James B. Renacci of Ohio and Rep. John Lewis of Georgia as the proposed "Stolen Identity Refund Fraud Prevention Act of 2017." It requires the IRS to notify the taxpayer of any unauthorized use of his or her identity and provide instructions about filing a police report.  It further requires the establishment of a centralized point of contact at the IRS for victims of identity theft, and creates a law enforcement liaison within the IRS to coordinate identity theft cases with local police and law enforcement officials.

          Previously, H.R. 4459, the "Taxpayer Identity Theft Protection Act," introduced in the House on February 3, 2016, by Rep. Ann Wagner of Missouri, proposed to amend the Internal Revenue Code ("IRC") to require the IRS to issue an identity protection personal identification number to an individual taxpayer, after the taxpayer's true identity has been established and verified, to prevent the misuse of the taxpayer's Social Security account number on fraudulent income tax returns.

         To date, the only provision enacted into law to combat tax-related identity theft is 26 U.S.C. § 6402(m), a new subsection that was added to § 6402 of the IRC on December 18, 2015, by the Protecting Americans from Tax Hikes Act of 2015 (the "PATH Act"), Pub. L. No. 114-113. It mandates that no credit or refund for an overpayment for a taxable year shall be made to a taxpayer before February 15 if the taxpayer claimed the Earned Income Tax Credit ("EITC") or the Additional Child Tax Credit ("ACTC") on the return.

         Returns involving the EITC or the ACTC are particularly attractive to fraudulent filers, as the two credits are "refundable," meaning that filers can receive them even if they do not owe any tax. The delay is intended to help the IRS detect fraud before refund checks are issued. Unfortunately, the two credits largely benefit lower-income working people, many of whom habitually rely on their tax refunds to pay living expenses or bills in the early part of the year.

         Attorneys may find that their practices are impacted by the increase in tax related identity theft in a number of ways:

    • Victims of identity theft may contact attorneys for assistance in dealing with the IRS. IRS Form 14039, the "Identity Theft Affidavit," should be filed in the event a client's return is rejected as a duplicate filing. Additionally, attorneys may assist or advise clients with filing a complaint with the Federal Trade Commission ("FTC") at identitytheft.gov, placing a "fraud alert" on the client's credit reports, and/or contacting financial and credit institutions to freeze or close affected accounts.

    • Public interest and bankruptcy attorneys may notice that their clients are adversely affected financially by the PATH Act refund delay, which goes into effect for the first time in 2017. While unfortunately the delay is unavoidable, attorneys can advise clients to expect delayed refunds and plan accordingly in bankruptcy and collections matters.

    • Finally, and perhaps most obviously, criminal defense attorneys may be called upon to represent individuals accused of participating in identity theft schemes.

         Attorneys seeking legal research or writing related to any of these issues are encouraged to contact the attorneys of the National Legal Research Group.

    Topics: tax, identity theft, stolen Social Security number

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