This article first appeared in the November 25, 2015 edition of Tax Notes Today.
A pilot program contacting thousands of filers who might not have otherwise known that someone else used their Social Security number to gain employment will help the IRS better balance statutory mandates and filer interests, according to IRS Commissioner John Koskinen.
However, Senate Finance Committee member Daniel Coats, R-Ind., believes the pilot undermines IRS claims that section 6103 privacy rules and other factors limit its capacity to broadly combat employment-related identity theft, his office said. Coats has recently questioned the IRS's general practice of not notifying the legitimate holder of an SSN if the SSN is falsely listed on the Form W-2 of another person who is technically filing tax returns using an individual taxpayer identification number (ITIN).
Typically, a U.S. wage earner's SSN appears on the filed tax returns as well as information returns such as the Form W-2, and the IRS uses the SSN to cross-reference the two.
However, the IRS assigns an ITIN to filers who are ineligible for an SSN, to record on their tax return instead. ITIN taxpayers can include undocumented workers residing in the United States, who are still required to pay income taxes. If any worker provides an employer someone else's SSN to get a job, the employer may list that SSN on the worker's Form W-2, but the IRS still relies on the ITIN listed on the W-2 to cross-reference with the filer's tax return.
Specific cases vary, as described in a 2010 Treasury Inspector General for Tax Administration report on collection issues related to ITIN filers, but the result is that the IRS may see someone else's SSN on an ITIN filer's W-2, which IRS critics say is often evidence of identity theft.
The IRS's broad argument has been that such cases do not directly affect tax administration -- filing, reporting, or collection. The IRS also defends its current posture on the grounds that verifying employment-related identity theft cases would be beyond its resources and statutory mandate.
Responding to the 2010 TIGTA report, the IRS said that the Social Security Administration (SSA) already had a program to notify SSN holders of W-2 inconsistencies and that a similar effort by the IRS would be redundant.
But because of budgetary constraints, the SSA stopped sending those notification letters to employers in 2011, and to employees and self-employed individuals in 2013, the SSA said in a written statement to Tax Analysts, which also explained how to report the theft of one's own identity.
"People need to be careful with their SSN and their [Social Security] card," the SSA added. The uncertainty raised by the IRS's trial attempt to address employment identity theft illustrates the issue's complexity, particularly as it relates to tax administration.
The SSA later clarified that it does not alert potential identity theft victims, telling Tax Analysts: "There is not a program by which SSA notifies individuals whose SSNs appear to be compromised."
"Senator Coats believes that neither the IRS nor SSA are adequately addressing this situation," his office said.
'Borrowing' Versus Theft
The Internal Revenue Manual uses the neutral term "SSN borrowing" to refer to these W-2 mismatches. Speaking to Tax Analysts after a November 18 public meeting of the Internal Revenue Service Advisory Council in Washington, Koskinen said that the IRS's overriding statutory mandate is to administer the tax code as written by Congress.
Section 6103 prohibits the IRS from disclosing the name of an identity thief or his employer even to the thief's victim, according to an IRS Web page about employment-related identity theft. The page said the IRS may send a "letter 4491 C" to a potential victim, letting him know his SSN was used by someone else to gain employment, but its standard for doing so was not stated. The IRS did not respond to inquiries about the letter 4491 C program.
How many "SSN borrowing" ITIN filers are undocumented workers is unclear. Koskinen said that many borrowers are simply relatives, not identity thieves, but he also noted that the IRS must by law collect taxes from all U.S. workers, regardless of immigration status.
"In the vast majority of these cases, the undocumented resident is paying their legitimate taxes, meeting their tax obligation, and it's not affecting anyone else," Koskinen told Tax Analysts.
However, two employment identity theft victims who faced erroneous IRS exams for understatement of income -- based on Forms W-2 that falsely listed their SSNs -- were quoted in a recent investigation by television news station WTHR in Indianapolis. WTHR later raised the larger issue with Coats.
The WTHR story quoted redacted portions of the IRM, stating that even if a taxpayer case has been marked as "Employment-related Identity Theft" in the database used to manage cases, the legitimate SSN holder should not be notified because the case does not meet the standard of "Taxpayer-Initiated Allegations of Identity Theft."
That portion of the manual essentially bars the IRS employee from alerting a potential employment-related identity theft victim unless the filer in question becomes suspicious and alerts the IRS.
The two filers interviewed by WTHR said the IRS took months to clear their names and withheld information about the theft of their SSNs.
Koskinen said that when employment identity theft disrupts tax filings, "clearly we need to work efficiently with the taxpayers and make sure that they don't have any more difficulty than we can afford."
But he added: "Our primary responsibility is . . . to collect those taxes."
The Search for Solutions
"We're not in the immigration enforcement business; that's not our role," Koskinen said November 19 after a press conference in Washington launching a tax identity theft public awareness campaign. "We're tax administrators."
Another role Koskinen attributed to the IRS was protecting filers from identity theft. In a written statement to Tax Analysts, the IRS noted its efforts to combat what it calls stolen identity refund fraud.
The IRS also said it was reviewing the results of the pilot program looking at the use of SSNs by "other individuals" to gain employment. Koskinen said the pilot is still underway, and that although he could not share details until its results are in, the taxpayers of interest "come in all shapes and sizes, including those with ITINs."
Koskinen framed the pilot as an attempt to balance the statutory mandate to collect tax obligations against the IRS commitment to protect filers. "We think we'll learn something from this, but I think it involves several thousand contacts with taxpayers," he said. "And so we'll be delighted to let you know how it goes."
TIGTA plans to release a report titled "Assistance to Taxpayers Affected by Employment-Related Identity Theft" in February 2016, Inspector General J. Russell George said August 26 at a Senate Budget Committee hearing on identity theft.
The IRS initiated the Employment Related Identity Theft Notification Project in July 2014, mailing about 25,000 letters to potential employment identity theft victims whose SSNs appeared on someone else's Form W-2 accompanying a tax year 2013 return, George said. The letters told the filers that their SSN was used by someone else to gain employment and advised them how to protect themselves, but they also stated that the IRS could not disclose the identity of the person who used their SSN, he added.
A TIGTA spokesperson told Tax Analysts that TIGTA continues to be concerned about limitations in the IRS's ability to prevent identity theft.
The office of National Taxpayer Advocate Nina Olson restated her belief that the IRS should notify filers whose SSNs have been compromised because they can be misused for nontax purposes as well. The IRS has yet to implement that recommendation, it added.
Coats also appears likely to continue pushing the issue. "We are working on a more comprehensive solution to this problem," his office said.
In the interim, Coats believes the IRS should notify employment identity theft victims, offer them an identity protection personal identification number, and notify the SSA of the theft to ensure victims' earnings are correctly reflected and their benefits are not affected, his office added.
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