During tax season beware risks of losing your identity

You’re ahead of the curve — you’ve filed your tax return early, but then you discover that a fraudster has stolen your PII and already filed one in your name. You’re a victim of the stolen identity federal income tax refund fraud scheme.

Most mail carriers are honest and hard-working employees. But some residents of Phenix City, Alabama, are glad not to see mailman Demetrius Jones come to their houses anymore. On Aug. 29, 2018, a federal grand jury returned an indictment against Jones for his role in a fraudulent federal income tax refund scheme. His co-conspirators allegedly filed fake federal income tax returns for refunds after stealing personally identifiable information (PII) from numerous sources, including a state of Alabama database. They would then direct the U.S. Internal Revenue Service to mail the fraudulent refund checks to addresses on Jones’ postal route. Jones would give the refund checks to his co-conspirators and receive money from them. [See the Aug. 29, 2018, Department of Justice (DOJ) release, Postal Employee Indicted in a Stolen Identity Refund Fraud Scheme.]

According to the DOJ, “If convicted, Jones faces a statutory maximum sentence of 10 years in prison for the conspiracy count, 20 years in prison for each count of mail fraud, and a mandatory minimum sentence of two years in prison for aggravated identity theft. The defendant also faces substantial monetary penalties, supervised release, restitution, and forfeiture.”

Thieves around every corner

This case is just one of many in which thieves have stolen individuals’ identities and used them in a U.S. federal income tax refund fraud scheme, which continues unabated. As we enter the tax season, make sure your tax preparers have triple-A-plus reputations because they and others have to protect your taxpayer information and your assets.

Crooked tax preparers

“In the past decade, the [U.S.] Tax Division has obtained injunctions against hundreds of unscrupulous tax preparers,” according to the DOJ in Federal Court Shuts Down Florida Tax Return Preparer, June 25, 2018.

For example, the DOJ described how Jackie Chaney, a tax preparer, ran her scheme. After stealing taxpayers’ names and Social Security numbers, she and her co-conspirators filed fraudulent tax returns to seek refunds from the IRS via checks or prepaid debit cards, which they converted to cash. She pleaded guilty on Dec. 28, 2016 to one count of conspiracy to defraud the U.S. and “to commit theft of public money, wire fraud and aggravated identity theft.”

The courts sentenced Chaney to two years in prison, two years of supervised release and restitution of $809,605. Authorities sentenced her co-conspirator Alicia Washington to 42 months in prison. (See Louisiana Woman Sentenced in Stolen Identity Tax Refund Fraud Scheme, May 28, 2018.)

In 2018, the IRS provided tips when selecting a tax preparer. (See Tax Return Preparer Fraud Ranks on 2018 ‘Dirty Dozen’: Taxpayers Urged to Choose Reputable Tax Preparers.)

• Be sure 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.
• Avoid preparers, of course, who have a reputation of disappearing after filing returns. You might have questions that only they can answer about your return.
• Ask to see professional credentials (enrolled agent, certified public accountant or attorney) and check to see if they belong to a professional organization or attend continuing education classes. Tax law is complex, and a good tax professional makes sure their knowledge is up to date. The IRS website has more information on 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 searchable directory can help locate a tax return preparer with the desired qualifications. It includes the names, cities, states and Zip codes of attorneys, CPAs, enrolled agents, enrolled retirement plan agents, enrolled actuaries and annual filing season program participants.
• Explore the preparer’s history. Check the Better Business Bureau. Look 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.
• Make sure the preparer offers IRS e-file, and ask to e-file the tax return. 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 returns.
• Reputable preparers need your tax records and receipts. They’ll ask questions to determine your total income, deductions, tax credits and other items.
• Avoid a preparer who’s willing to e-file using a pay stub instead of a Form W-2. This is against IRS e-file rules.
• Understand representation rules. Attorneys, CPAs and enrolled agents can represent any client before the IRS in any situation. IRS Annual Filing Season Program participants may represent taxpayers in limited situations if they prepared and signed the return.
• Never sign a blank return.
• Review the tax return before signing. Ask questions if something isn’t clear.
• Make sure you’re comfortable with the accuracy of the return and that the refund goes directly to you — not into the preparer’s bank account.
• Review the routing and bank account number on the completed return.
• Report abusive tax preparers and suspected tax fraud to the IRS. Use Form 14157, Complaint: Tax Return Preparer. If a return preparer is suspected of filing or changing the return without the client’s consent, also file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit.

Yet more fraudulent tax behavior

Corrupt tax preparers and hackers aren’t the only ones involved in this scheme. On Aug. 9, 2018, the DOJ reported that Stephanie Parker, a contact representative for the IRS in its Atlanta office, pleaded guilty to aggravated identity theft for her part in a federal tax refund tax scheme.

Between September 2012 and March 2013, she purportedly assisted taxpayers when they called for help. However, on at least five occasions she used callers’ Social Security numbers and addresses to surreptitiously electronically file for fraudulent tax refunds. She directed the tax refunds to her friends’ bank accounts. She then withdrew money from at least one of the accounts and deposited some of it into her account to pay for personal expenses.

Because identity theft was involved, she faces a mandatory two-year prison sentence along with restitution, monetary penalties and a period of supervised release. (See IRS Employee Pleads Guilty to Identity Theft.)

Hacker behavior

Hackers haven’t missed the opportunity to profit from the stolen identity federal income tax refund fraud scheme. They’ve been aggressive in stealing PII by hacking into tax preparers’ databases. On July 10, 2018, the IRS announced that it launched several awareness campaigns to help tax preparers protect taxpayer’s PII. (See Because hackers have Tax Security 101 – IRS, Security Summit partners launch new awareness campaign; Urge tax professionals to step up protections for client data.)

Help your community

Share this information with your business associates, family, friends and clients and include it in your outreach programs. You’ve been forewarned, so tread with care!

For a comprehensive analysis of the stolen identity federal income tax refund fraud scheme, please read the two feature articles that my co-authors and I wrote for the January/February 2014 and March/April 2014 issues of Fraud Magazine.

Please contact me if you have identity theft or cyber-related issues you’d like me to research and possibly include in future columns or feature articles, or if you have any questions about this column or other cybersecurity and identity theft issues. I don’t have all the answers, but I’ll do my best to help. Stay tuned!

Robert E. Holtfreter, Ph.D., CFE, is distinguished professor of accounting and research at Central Washington University in Ellensburg, Wash. He’s also on the ACFE’s Advisory Council and the Editorial Advisory Committee. Holtfreter was the recipient of the 2017 Hubbard Award for the best Fraud Magazine feature article in 2016. Contact him at doctorh007@gmail.com.