The Southbourne Tax Group: IRS Making Strides in Detecting Fraudulent Tax Returns

The IRS has improved its identification of fraudulent tax returns that involve identity theft, but the agency needs to be more accurate in its identity theft estimates, according to a new report from the Treasury Inspector General for Tax Administration (TIGTA).

TIGTA performed an audit to determine how effective the IRS is at detecting and preventing identity theft. The watchdog also looked at how the IRS is measuring undetected identity theft and coordinating identity theft information with other agencies and tax industry partners.

TIGTA identified 568,329 undetected potentially bogus tax returns with refunds totaling more than $1.6 billion for tax year 2013. That’s a drop of more than $523 million from the prior year, the report states.

However, the false reporting of wages and withholding accounts for the largest amount of undetected potentially fraudulent refunds at $1.3 billion. TIGTA believes the new Jan. 31 deadline for employers to file their W-2 forms with the Social Security Administration will reduce this type of fraudulent return.

The new Jan. 31 filing deadline also applies to certain Forms 1099-MISC reporting nonemployee compensation, such as payments to independent contractors.

TIGTA also noted that using states’ lead data during tax return processing could improve detection of identity theft.

TIGTA also discovered that the accuracy of the Identity Theft Taxonomy quantification for both protected and unprotected revenue needs improvement. As an example, the IRS’s estimate of protected revenue was overstated by almost $2.4 billion as a result of the wrong calculation of refunds associated with rejected electronically filed tax returns.

The audit resulted in the following six recommendations, which the IRS agreed with:

1. Expand the use of identity theft models to include all accelerated W-2s to compare with tax returns for possible identity theft.
2. Develop criteria to identify and evaluate potential fraud in tax returns.
3. Develop a way to use state lead data to help evaluate tax returns for identity theft.
4. Use tax return data to find the refund amount associated with electronically filed tax returns that were rejected when computing revenues, leave out rejected returns that don’t claim a refund, and account for tax returns with multiple reasons for rejection.
5. Review revenues to ensure that duplicate tax returns are omitted.
6. Tax returns with mismatched income because of amended or duplicate income documents should not be considered for potential identity theft.

Additional resources for business accounting tips are available here

The Southbourne Tax Group: Voices Preventing tax-related ID theft

As the owner of a small tax office business, I see tax-related identity theft among others often, but when it happened to my employees as well, I decided to expand the responsibilities of my business to become tax protectors as well as tax preparers. To do this, I needed to educate not only my employees and clients, but first, myself. I was then able to take action that has provided positive results and empowered employees and a loyal customer base.

Tax-related identity theft happens when a taxpayer’s Social Security number is obtained from someone else and used to file a tax return claiming a refund. Thieves may also use a stolen Employee Identification Number from your business clients to create fake W-2s. Both of these actions could support fraudulent refund schemes.

For example, earlier this year at Tampa General Hospital, an employee with access to the personal health information of thousands of patients was found guilty of illegally accessing the personal information of more than 600 patients between June 2011 and December 2012. That information was used to file 29 false tax returns of refunds totaling over $226,000.

So my first step was to become intimately familiar with Publication 5199, Tax Preparer Guide to Identity Theft, and IRS.gov. Most of the information I organized into steps derived from these resources. This helped me to formulate actions when identity theft happens or when fraud is suspected, and finally what measures to take in prevention. My next step was to lay out separate procedures for reporting and prevention.

In either instance, I directed all employees and recommended to clients that they become familiar with the Federal Trade Commission Web site, www.identitytheft.gov, for reporting fraud or protecting their credit.

For prevention of identity theft and fraud, I made it policy for all my employees to mark out the Social Security number and direct deposit bank account information when providing physical copies of returns to clients. This was the most obvious weakness, as it could allow someone simple access in obtaining a Social Security number just through viewing someone’s return. Secondly, I provided referral information to them regarding securing their credit with fraud alerts or a security freeze through the three major credit bureaus, Experian, Equifax and TransUnion. This was something that each employee and client needed to do independently.

Last and most important, I made it mandatory for all tax preparers to obtain certification with the Internal Revenue Service. This was actually easier to implement, as I offered to reimburse my employees for their training and testing. Having certified preparers turned out to be a valuable investment all around as it not only increased their knowledge, but also their job satisfaction.

These are some specific steps I started looking for as warning signs before reporting:

1. When you receive an IRS reject code of R0000-902-01 for one of your clients, this indicates the Social Security number was already used in a previous return.
2. The IRS reports that your client has a balance due, refund offset or a collection action taken for a year in which they did not file.
3. IRS records indicate that your client received wages from an unknown employer.
4. Your business client receives an IRS notice about an amended return, fake employees, or about a bogus business. (Note: The IRS will only communicate with your clients by postal mail. They will never use e-mail or phone!)
5. Lastly, I directed all employees to closely examine all tax forms (i.e., W-2s, 1099s and so on) for physical tampering or alterations, excessive income or federal income tax withheld.

For actual reporting, I took these actions:

1. Instructed employees and clients to never ignore any IRS notice they receive in the mail, and to bring it to the office as soon as possible for action.
2. Assisted employees and clients in completing Form 14039, Identity Theft Affidavit, and faxing or mailing it to the IRS.
3. Requested clients provide a power of attorney on file so I may speak directly to the IRS on their behalf. (I’m working on my Enrolled Agent certification, as this will remove the necessity for this step.)

The last couple of tax seasons have shown that these actions are a win-win for my clients, my tax preparers and my business. Employees are empowered to get real help to our clients on a topic we were not previously prepared for.

I have applied these steps not only to my employees and clients, but to their families, friends and people I’m just meeting for the first time.

These aggressive and direct steps show how much we care, and knowing that someone cares goes a long way in keeping employees and clients reassured during a stressful situation and eventually getting them the help they need. This makes all involved happier and has shown a growth in returning customers.

Establishing identity theft protection and recovery action plans for my employees and clients certainly worked for me. It went a long way to establishing and maintaining positive and trusting relationships.

Make a plan and protect your internal and external interests. Doing so could go a long way in securing your business growth, but most importantly guard against this industry threat.

Additional resources for business accounting tips are available here.

The Southbourne Tax Group: Beware the Latest Tax-Season Spear-Phishing Scam

You may have heard of the CEO scam: that’s where spear-phishers impersonate a CEO to hit up a company for sensitive information.

That’s what happened to Snapchat, when an email came in to its payroll department, masked as an email from CEO Evan Spiegel and asking for employee payroll information.

Snapchat’s payroll department fell for it. Ouch.

Here’s a turn of that same type of screw: the Internal Revenue Service (IRS) last week sent out an urgent warning about a new tax season scam that wraps the CEO fraud in with a W-2 scam, then adds a dollop of wire fraud on top.

A W-2 is a US federal tax form, issued by employers, that has a wealth of personal financial information, including taxpayer ID and how much an employee was paid in a year.

This new and nasty dual-phishing scam has moved beyond the corporate world to target nonprofits such as school districts, healthcare organizations, chain restaurants, temporary staffing agencies and tribal organizations.

As with earlier CEO spoofing scams, the crooks are doctoring emails to make the messages look like they’re coming from an organization’s executive. Sending the phishing messages to employees in payroll or human resources departments, the criminals request a list of all employees and their W-2 forms.

The scam, sometimes referred to as business email compromise (BEC) or business email spoofing (BES), first appeared last year. This year, it’s not only being sent to a broader set of intended victims; it’s also being sent out earlier in the tax season than last year.

In a new twist, this year’s spam scamwich also features a followup email from that “executive”, sent to payroll or the comptroller, asking for a wire transfer to a certain account.

The wire transfer scam isn’t tax-related: it’s just hitching a ride on the tax-related W-2 scam. Some companies have been swindled twice: they’ve lost both employees’ W-2s and thousands of dollars sent out via the wire transfers.

The IRS is telling organizations that receive the W-2 scam emails to forward them to Phishing IRS, with the subject line of “W2 Scam”.

If your business has already fallen for the scam, it can file a complaint with the Internet Crime Complaint Center (IC3), operated by the FBI. Employees whose W-2 forms have been stolen should review the recommended actions by the Federal Trade Commission or the IRS identity theft.

The IRS says that employees should also file a Form 14039 Identity Theft Affidavit (PDF) if their own tax returns get rejected because of a duplicate Social Security number or if instructed to do so by the IRS.

How to sidestep the scam

But before you even get to the sad state of having to file a report about getting ripped off, it’s better to avoid falling for the bait in the first place.

Unfortunately, that’s getting tougher as crooks get more and more cunning. Case in point: the carefully crafted, well-disguised attack that led to the hacking of Clinton campaign chair John Podesta’s Gmail account. The attack relied on a shortened Bitly link to mask nefarious HTML code.

Screenshots of the Bitly link used against Podesta show that even the longer links hiding behind rigged Bitly links can be made to look, to an untrained eye, like they’re legitimate.

One step that can protect against phishing attacks is to pick proper passwords. Even though strong passwords don’t help if you’re phished (the crooks get the strong password anyway), they make it much harder for crooks to guess their way in.

Use two-factor authentication whenever you can. That way, even if the crooks phish your password once, they can’t keep logging back into your email account.

Also, consider using Sophos Home. The free security software for Mac and Windows blocks malware and keeps you away from risky web links and phishing sites.

The Southbourne Tax Group: IRS Offers Tips on Choosing a Tax Preparer

The Internal Revenue Service is cautioning taxpayers to be on the lookout for unscrupulous return preparers, one of the most common “Dirty Dozen” tax scams seen during tax season.

The vast majority of tax professionals provide honest, high-quality service. But there are some dishonest preparers who set up shop each filing season to perpetrate refund fraud, identity theft and other scams that hurt taxpayers. That's why unscrupulous preparers who prey on unsuspecting taxpayers with outlandish promises of overly large refunds make the Dirty Dozen list every year.

"Choose your tax return preparer carefully because you entrust them with your private financial information that needs to be protected," said IRS Commissioner John Koskinen. "Most preparers provide high-quality service but we run across cases each year where unscrupulous preparers steal from their clients and misfile their taxes." 

Return preparers are a vital part of the U.S. tax system. About 60 percent of taxpayers use tax professionals to prepare their returns.

Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.

Choosing Return Preparers Carefully

It is important to choose carefully when hiring an individual or firm to prepare a tax return. Well-intentioned taxpayers can be misled by preparers who don’t understand taxes or who mislead people into taking credits or deductions they aren’t entitled to in order to increase their fee. Every year, these types of tax preparers face everything from penalties to jail time for defrauding their clients.

Here are a few tips when choosing a tax preparer:

• Ask if the preparer has an IRS Preparer Tax Identification Number (PTIN). Paid tax return preparers are required to register with the IRS, have a PTIN and include it on tax returns.
• Inquire whether the tax return preparer has a professional credential (enrolled agent, certified public accountant or attorney), belongs to a professional organization or attends continuing education classes. A number of tax law changes can be complex. A competent tax professional needs to be up-to-date in these matters. Tax return preparers aren’t required to have a professional credential. The IRS website has more information regarding the national tax professional organizations.
• Check the preparer’s qualifications. Use the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications. This tool can help locate a tax return preparer with the preferred qualifications
• The Directory is a searchable and sortable listing of certain preparers registered with the IRS. It includes the name, city, state and zip code of:

o    Attorneys

o    CPAs

o    Enrolled Agents

o    Enrolled Retirement Plan Agents

o    Enrolled Actuaries

o    Annual Filing Season Program participants

• Check the preparer’s history. Ask the Better Business Bureau about the preparer. Check for disciplinary actions and the license status for credentialed preparers. For CPAs, check with the State Board of Accountancy. For attorneys, check with the State Bar Association. For Enrolled Agents, go to IRS.gov and search for “verify enrolled agent status” or check the Directory.
• Ask about service fees. Avoid preparers who base fees on a percentage of their client’s refund or boast bigger refunds than their competition. Don’t give your tax documents, SSNs, and other information to a preparer when only inquiring about their services and fees. Unfortunately, some preparers have improperly filed returns without the taxpayer’s permission once the records were obtained.
• Ask to e-file your return. Make sure your preparer offers IRS e-file. Paid preparers who do taxes for more than 10 clients generally must file electronically. The IRS has processed more than 1.5 billion e-filed tax returns. It’s the safest and most accurate way to file a return.
• Provide records and receipts. Good preparers will ask to see your records and receipts. They’ll ask questions to determine your total income, deductions, tax credits and other items. Do not rely on a preparer who is willing to e-file your return using your last pay stub instead of your Form W-2. This is against IRS e-file rules.
• Make sure the preparer is available. In the event questions come up about your tax return, you may need to contact your preparer after the return is filed. Avoid fly-by-night preparers.
• Understand who can represent you. Attorneys, CPAs, and enrolled agents can represent any client before the IRS in any situation. Annual Filing Season Program participants may represent you in limited situations if they prepared and signed your return. However, non-credentialed preparers who do not participate in the Annual Filing Season Program may only represent clients before the IRS on returns they prepared and signed on or before Dec. 31, 2015.
• Never sign a blank return. Don’t use a tax preparer that asks you to sign an incomplete or blank tax form.
• Review your return before signing. Before you sign your tax return, review it and ask questions if something is not clear. Make sure you’re comfortable with the accuracy of the return before you sign it and that your refund goes directly to you – not into the preparer’s bank account. Reviewing the routing and bank account number on the completed return is always a good idea.
• Report abusive tax preparers to the IRS. You can report abusive tax return preparers and suspected tax fraud to the IRS. Use Form 14157, Complaint: Tax Return Preparer. If you suspect a return preparer filed or changed the return without your consent, you should also file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit. You can get these forms on IRS.gov.

To find other tips about choosing a preparer, understanding the differences in credentials and qualifications, researching the IRS preparer directory, and learning how to submit a complaint regarding a tax return preparer.

Taxpayers are legally responsible for what is on their tax return even if someone else prepares it.

The Southbourne Tax Group: Straight Talk - Be aware of the 'Dirty Dozen' of tax scams

The Canton Regional and Greater West Virginia Better Business Bureau offers tips and advice for consumers to avoid fraudulent practices.

Today's topic: IRS warns of the "Dirty Dozen"

The concern: Every year, the IRS compiles their "Dirty Dozen," a list of common scams that can affect taxpayers at any time of the year, but strike more often during filing season as consumers finalize their tax returns.

How the scam works:

Phishing schemes Criminals pose as a person or organization the taxpayer trusts or recognizes. They may hack an email account and send mass emails under another person's name. They may pose as a bank, credit card company, tax software provider or government agency. Criminals go to great lengths to create websites that appear legitimate but contain phony log-in pages. These criminals hope victims will take the bait and provide money, passwords, Social Security numbers and other information that can lead to identity theft.

Business email compromise (BEC) / W-2 phishing scam Cybercriminals use spoofing techniques to disguise an email to make it appear as if it is from an organization executive. The email is sent to an employee in the payroll or human resources departments, requesting a list of all employees and their W-2s "for a quick review." But it's not real, and those who reply are sending employees' names, Social Security numbers and income information to scammers, who then file fraudulent returns for tax refunds.

Tax identity theft Tax-related identity theft involves scams with the intent to steal personal and financial data from taxpayers or data held by tax professionals. One such way is when a scammer uses a stolen Social Security number to file a fraudulent tax return and claiming the refund. It also happens when someone uses your SSN to earn wages, and sticks you with the tax bill.

Fake charities Groups masquerade as charitable organizations to attract donations from unsuspecting contributors. One type of abuse or fraud involves scams that occur in the wake of significant natural disasters. Scam artists impersonate charities to get money or private information from well-intentioned taxpayers. Scammers can use a variety of tactics; some operate bogus charities and contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.

Tips to avoid these scams:

File early. File your tax return as early as possible to avoid a scammer filing instead.

Be secure. Use a secure internet connection if you file electronically, or mail your tax return directly from the post office.

Know the IRS. The IRS will not contact you by email, text or social media. If the IRS needs information, it will contact you by mail.

Be aware of your credit. Check your credit report for free at annualcreditreport.com to make sure there are no unauthorized accounts.

Protect personal data. Don't routinely carry a Social Security card, and make sure tax records are secure. Treat personal information like cash; don't leave it lying around.

Know phishing. Learn to recognize and avoid phishing emails, threatening phone calls and texts from thieves posing as legitimate organizations such as a bank, credit card company and government organizations, including the IRS. Do not click on links or download attachments from unknown or suspicious emails.

Be informed. To see the remaining "Dirty Dozen" and find more tax-time tips, visit the IRS website.

The Southbourne Tax Group: Tips on having an efficient tax appointment

1. LOUIS, MO (KTVI)–Sandy Furuya with Wamhoff Financial Planning and Accounting provides tips to help you be ready for your tax appointment and make it a productive, stress-free experience.

What should I bring?

• As a general rule of thumb, it’s always best to bring too much than not enough. So if in doubt, bring it with you! This list includes:

1. Tax forms you`ve received from employers, vendors, or government authorities: w-2s, 1099s
2. Statements from your brokerage and investment accounts (many of these 1099s do not arrive until February or later, and many are not final)
3. Receipts and supporting materials for business-related expenses
4. Forms or receipts related to moving, childcare, education, medical expenses, home mortgage, etc.
5. Social security card for any new dependents
6. Mileage logs
7. Home office deductions
8. Any changes that will affect the future year
9. Any notices you’ve received from the government, including your IP pin if you’ve had identity theft
10. Voided check for direct deposit of your refund. This year, your tax professional must verify this information and sign off on it.

• If you’re working with a new tax firm, you can call ahead and discuss what they need. You’ll typically be asked to bring the prior two year’s returns and potentially other items.

Other things to know and do:

• Make a list ahead of time with questions you have for your tax professional. This helps to ensure a productive meeting, and helps you receive the most comprehensive tax advice.
• Many tax professionals have an organizer they can provide which will assist you in gathering your information. Ask for it and use it!
• Be aware that the IRS will be delaying refunds this year until mid-February for people claiming the earned income tax credit, additional child tax credit, or the american opportunity tax credit. In addition, your tax preparer will be required to complete a due diligence checklist form 8867 as required by the path act.
• There are new id and refund fraud safeguards put in place by the IRS and states which will cause additional review of tax returns.
• After filing, you can use ‘where`s my refund’ tool at IRS.gov, or the IRS2go mobile app to check on the status of your federal refund.

The Southbourne Tax Group: Ready to file your 2016 taxes?

The 2016 tax filing season has begun, with W-2s arriving in the mail and some confusion arising from news of a refund delay.

While most people will be minimally impacted by changes this year, one of the biggest additions is aimed at helping low-income families.

The California earned income tax credit is entering its second year. The credit applies to people who earn $6,717 or less with no children up to $14,161 with two or more children. To help you get the most out of your taxes, we asked Aaron Martinez, a tax expert with H&R Block since 1998, and Andrew Nelsen, a certified public accountant in Fountain Valley, for tips ahead of the April 18 filing deadline.

REFUND DELAY

Some who file early may be in for a surprise. Those claiming the EITC or a child tax credit – an estimated 30 million taxpayers – will have their refund held until Feb. 15.

“We’re telling everyone to file normally,” Martinez said. “They just have to wait a little bit longer to get their refund.”

The delay, created by the Protecting Americans From Tax Hikes (PATH) Act of 2015, is meant to prevent fraud.

“Those two credits are target credits for identity thieves and fraudsters. The IRS wants to make sure that the W-2s that are coming in are correct and that they have time to make sure there is no theft,” Martinez said.

The IRS estimates that as many as 26 percent of EITC claims may be paid erroneously in 2015. “Some of the errors are unintentional, caused by the complexity of the law, but some of the claims are intentional disregard of the law,” the agency said.

For people who need the refund sooner, H&R Block is offering a $1,250 refund advance, a no-interest loan that’s repaid when the refund is issued by the IRS.

WHAT's NEW

The personal exemption has been increased to $4,050. But that amount is phased out for taxpayers at higher income levels. Similarly, those with higher adjusted gross income might not be able to get the full value of their deductions.

The alternative minimum tax is still around, but the exemption has increased to $53,900 for single taxpayers, $83,000 for those married filing jointly and $41,900 for married filing separately.

People who have been issued an individual taxpayer identification number, or ITIN, instead of a Social Security number may have to renew it before filing their tax returns. The IRS says current ITINs will no longer be valid if they weren’t used at least once in the last three years or if the number was issued before 2013.

Make sure you have last year’s tax return handy when you prepare to file your taxes this year.

“Taxpayers who are changing tax software products this filing season will need their adjusted gross income from their 2015 tax return in order to file electronically,” the IRS said. “The electronic filing PIN is no longer an option.”

That, too, is part of the agency’s attempt to battle tax fraud and identity theft.

CLAIM ALL YOUR CREDITS

Martinez said there are a lot of deductions people forget to take. They include:

--Charitable contributions

--Mortgage interest, property taxes and mortgage insurance

--Employee expenses such as mileage and phone bills

--Education costs: Schools issue a tuition statement, form 1098-T, for eligible deductions

--Filing status: For example, a single mother with a child can file as head of household

--Caring for parents

--Even if you have a degree, the IRS offers a lifetime learning credit of up to $2,000 annually

--Delivery drivers, especially those working for Uber, Lyft and DoorDash, should keep track of miles, oil changes and vehicle repairs as business expenses

PATH ACT

“A big change this year is the PATH Act. This act made some tax changes permanent and made some expire,” Martinez said.

Under the act, the American Opportunity Education Tax Credit, which gives undergraduate students up to $2,500 in tax credits, and some other tax breaks were made permanent.

This is the last year for private mortgage insurance, mortgage debt forgiveness, a tuition and fees deduction, and non-business energy credits.

“Next year is the year that could really be topsy-turvy,” said Nelsen. “Not a whole lot changed this year.”

AVOID SCAMS

To prevent fraud, file your taxes as early as possible, Martinez urges.

The IRS will not ask for your credit card or send the sheriff to your house. Anyone threatening to do so is likely a scammer.

Anyone impersonating the IRS can be reported online at ftccomplaintassistant.gov or by calling 800-366-4484.

EXTENSIONS

Taxpayers who need more time to file can request an extension.

“Getting a filing extension avoids the late filing penalty, but it doesn’t avoid the late payment penalty,” said Barbara Weltman, a consultant and author of books on taxes, law and finance.

So the advice from tax experts: To avoid the late payment penalty, estimate the amount due and pay it before the April 18 deadline. But even with that, you won’t be able to avoid interest on payments made after the deadline.

AFFORDABLE CARE ACT

While Republicans seem committed to repealing the Affordable Care Act, it remains to be seen what might replace it.

In the meantime, people who do not have health insurance should be prepared to pay more this year as penalties for those without coverage have risen.

The penalty for not having insurance is $695 per uninsured adult or 2.5 percent of household income over the filing threshold – whichever is greater. In 2015, it was $325 per uninsured adult or 2 percent of household income.

Enrollees with insurance through the state’s health exchange, Covered California, have to file a 1095-A form with their taxes.

To help with the cost, there are 30 exemptions available for people who are uninsured, according to Martinez.

“It’s in its third year. The first year people didn’t really understand it,” Nelsen said. “The second year penalties really started kicking in, and people started to catch on, so I know it’s on people’s mind this year.”