A Better Idea on Identity Theft

As I wrote yesterday, the IRS announced new rules on tax professionals regarding electronic filing. Based on my reading of these rules, the IRS should expect a significant increase in paper-filed returns. Why? Because the new rules likely violate state laws, they add costs to tax filing, and the simple (and cheapest) solution will be to just paper-file all remote returns. In my case, I may be required to do so as it appears to be illegal under Nevada law for me to run credit checks for the purpose of identifying my clients.

There is another major problem with the new rules: The scamsters will ignore them. Assume for the moment you’re an identity thief who is filing phony tax returns (or are an IRS Electronic Return Orginator who is sending phony returns to the IRS). That’s a crime, of course (probably several felonies). So if you’re such a person, are you going to make sure you follow IRS rules and check IDs of everyone who comes to your office and/or run credit checks on all clients, or are you just going to violate one more rule?

(A few years ago South Carolina passed a law that stated that any terrorist must register with the state. I am not making this up. I suspect that South Carolina has collected exactly $0 from this law. The new policy reminds me of this law. But I digress….)

The new IRS policy will have a minor impact, at best, on identity theft while increasing costs for tax professionals and their clients. It will increase the amount of returns that are paper-filed. Yet the IRS’s goal is laudable. Is there a better solution?

There is. It’s a combination of an idea I floated back in 2012 with a few minor tweaks.

Back in 2012 I wrote a post titled, “A Modest Proposal on Tax-Related Identity Theft.” It appeared to me to be a simple solution that would stop much of the problem of tax-related identity theft at a minimal cost to the IRS. That’s the first part of the plan.

(For those who have not read my initial idea, it’s fairly straightforward. The IRS should check each tax return’s address to verify it matches the address on file for the taxpayer. This should be simple to program into the IRS’s computers.)

The second part is to have a new box on Form 1040 (towards the top of the Form) titled “Change of Address.” If you changed your address from the last tax return you filed, you must check this box. (Many state returns have such a box.) There’s a catch: If you change your address, you must attach a copy of some third-party documentation noting the new address such as a utility bill, a HUD Settlement Statement, an apartment lease, etc. Since the IRS now accepts pdf’s of documents, these could be attached to efiled returns.

There’s a third part to this plan. There would be a second new box at the top of Form 1040 titled “First-Time Filer.” This box would be checked if this is the first tax return the individual has filed or the individual has not filed a tax return in (say) the last three years. The first tax return would need to be paper-filed. (This would be an additional exception to mandatory efiling and would be noted on Form 8948). With a taxpayer’s first return, the IRS computer systems would not be able to readily run identity theft checks; thus, such returns likely need to be paper-filed.

This plan, if implemented, would be a low cost method that should eliminate 90% of tax-related identity theft. It would cost taxpayers very little. Excluding the one-time programming costs for the IRS, this would not cost the IRS very much. (This really does appear to be a simple check. Does “Address” match “Address on File”?)

Let’s compare this to the costs involved with what the IRS announced in Publication 1345. This will directly cost tax professionals; we’ll have to subscribe to services to do this. This will increase the public’s cost; tax professionals will pass the additional costs on to the public. This will increase the IRS’s costs. A low-cost solution for tax professionals is to force clients to paper-file. Indeed, in some states that will be the only choice as the IRS’s new policy appears to violate state laws. Even if there’s a work-around for that, there appears to be no method for expatriates to now efile returns. They will be forced to paper-file.

The IRS’s policy is almost guaranteed to raise the ire of the tax-paying public. Under my proposal, it would be mostly seamless. More importantly, the IRS’s proposal will likely do nothing to stop the scamsters. These miscreants are not obeying numerous laws and are committing multiple felonies. Does anyone actually expect them to obey these new rules?

Had the IRS asked tax professionals who deal with remote clientele about the proposal, they would have heard about this prior to revising Publication 1345. Someone told me today that what has happened was unsurprising given how the IRS acts. That’s a shame, because there are better solutions.


2 Responses to “A Better Idea on Identity Theft”

  1. […] Fox follows up with A Better Idea on Identity Theft. “The IRS should check each tax return’s address to verify it matches the address on file […]

  2. KH says:

    Just renewed my MO driver’s license. They do this very thing.

    Lisa the License Lady: “Has your address changed from the one listed on your old license?”

    Me: “Yes, now it’s ”

    Lisa: “Okay, you’ll have to bring in a piece of mail showing your new address.”

    Me: “I see. I’ll be back later.”

    (Leave, print statement from credit card website, come back.)

    Me: “Back again; Here’s a credit card statement.”

    Lisa: “Sure, that will work.” (Type type type…) “Now sign here on the e-signature pad and sit for the photo. Your license will arrive in the mail; they don’t let us print them anymore.”