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Combating Tax Return Identity Theft


10/21/16
 
As the 2016 filing season gets underway, the Internal Revenue Service and many state taxing authorities are working diligently to prevent tax return identity theft, which has become rampant nationally. When a taxpayer is a victim of identity theft, it is recommended they file a Form 14039, Identity Theft Affidavit. The filing of this form will usually result in the issuance of an Identity Protection Personal Identification Number (IP PIN) – a six digit number that is entered in the signature area of the subsequent year Form 1040. This alerts the IRS that the taxpayer has been an identity theft victim and that they are the actual taxpayer. Any taxpayer that is issued an IP PIN will be unable to electronically file their personal income tax returns if the IP PIN is omitted.
 
Driver’s License Information Requirement and Earlier Employer W-2 Filing 
 
Some states are requiring the entry of driver’s license information in tax software used to prepare electronically filed income tax returns. The thought is that people filing phony income tax returns using actual social security numbers illegally obtained will not also possess the taxpayer’s driver’s license information. As of now, in New Jersey, entering driver license information will continue to be an optional data element when filing 2016 income tax returns electronically.  
 
Identity thieves often strike early in the year, reporting fictitious wages and withholding before the IRS and state taxing authorities have received W-2 forms from employers. Erroneous refunds are often issued prior to the taxing authority crosschecking tax return entries for wages and withholding to W-2 forms. In 2015 and previous years, W-2 forms were required to be sent to employees by January 31 of the following year, and employers were not required to file W-2 forms with the IRS until February 28th, if paper filing, and until March 31st, if electronically filing (required for employers filing 250 or more W-2 forms). In an effort to combat identity theft and be able to process W-2s earlier in the year, for tax years 2016 and after, employers are now required to file W-2s with the IRS by January 31st (changed from February 28th, if paper filing, and March 31st, if electronically filing). The requirement of W-2 forms to be sent to employees by January 31st of the following year remains unchanged. This new requirement holds true for employers whether paper filing or filing electronically.   
 
State-Level Preventative Measures
 
In recent years, the New Jersey Division of Taxation has sent letters to many taxpayers after their New Jersey gross income tax returns were received electronically, requesting the taxpayers to mail copies of W-2 forms or other forms on which New Jersey withholding taxes were reported (i.e. Form 1099-R). This is to verify the legitimacy of the withholding tax entries before issuing refunds. Utah adopted law changes to combat tax return identity theft. Beginning with 2015, Utah requires all electronically filed W-2 and 1099-R forms be filed by January 31 following the close of the year. Also, the Utah State Tax Commission can delay an individual income tax refund until March 1 unless both the employer and employee have filed all required returns and forms, enabling the State Tax Commission to match the data. Expect more states to pass similar measures in the coming years.   
 
Contact
 
For additional information, please contact Rick Puzo, Partner, Healthcare Industry Practice Leader, at 973-364-6675 richard.puzo@cohnreznick.com or Neil Becourtney, Partner, 732-380-8678; neil.becourtney@cohnreznick.com.
 
To learn more about the services CohnReznick provides for the medical industry, click here.
 
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
 
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