The IRS introduced the identity protection personal identification number (IP PIN) with the 2014 tax year in the Service's continuing effort to combat taxpayer identity theft fraud. Since then, CPAs have been getting accustomed to this new level of fraud protection. However, it has created new concerns and additional procedures that tax preparers must understand and comply with.
The IRS uses IP PINs as an authentication number to validate the correct holders of the Social Security numbers listed on tax returns. Once issued an IP PIN, taxpayers must include it when they electronically file their income taxes. This six-digit number should not be confused with the five-digit e-file PIN. Once a taxpayer is enrolled in the IP PIN program, the IRS annually reassigns a new number that must be used for the year.
Currently, there are only three ways to obtain an IP PIN: (1) Residents of Florida, Georgia, and the District of Columbia can participate in the IRS IP PIN pilot program; (2) the IRS unilaterally determines that a taxpayer is a victim of fraud and then informs the taxpayer; or (3) the taxpayer reports to the IRS (by submitting Form 14039, Identity Theft Affidavit) that he or she is a victim of tax-related identity theft.
In developing the first IP PIN scenario, the IRS determined that residents of Florida, Georgia, and the District of Columbia had the highest per capita percentage of tax-related identity theft. The IP PIN pilot program is designed to help the IRS evaluate taxpayer demand for the additional fraud protection that the IP PIN program provides. Currently, this is the only scenario under which taxpayers can simply apply to participate in the program, as long as they filed their previous year's federal tax return with an address in one of the three jurisdictions.
Until March 7, eligible taxpayers could apply using the IRS's "Get an Identity Protection PIN (IP PIN)" online tool. However, due to security concerns, the IRS has temporarily suspended use of the tool as of this writing. In the meantime, taxpayers in the pilot program may continue to use a previously issued IP PIN, but otherwise eligible new participants of the pilot program cannot obtain one. The online tool also can no longer be used to retrieve a lost IP PIN. To retrieve a lost IP PIN, a taxpayer should follow the instructions on the "Retrieve Your Lost or Misplaced IP PIN" webpage at irs.gov.
As with the other two scenarios, once approved and enrolled in the program, taxpayers cannot opt out of it. They must use the IP PIN on all future filings.
In the second scenario, the IP PIN process begins when a taxpayer receives a CP01A notice from the IRS, which advises the taxpayer that the IRS has independently determined that the taxpayer has been targeted as, or has become, a victim of tax identity fraud. This IRS proactive effort helps protect both the federal government and the taxpayer from future fraudulent filings involving the taxpayer. Upon receiving the notice, which contains the IP PIN, the taxpayer must now include the number on all of his or her future tax returns.
Under the last scenario, the taxpayer, upon learning that he or she has been the victim of tax identity fraud, may independently contact the IRS and open an investigation of the identity theft by filing Form 14039. Thereafter, upon a finding that in fact the taxpayer was a victim of identity theft tax fraud, the IRS will include the taxpayer in the IP PIN program and mail the taxpayer an annual IP PIN for tax filings.
Additional practice concerns arise in the application for, and use and management of, IP PINs. The IRS advises taxpayers to safeguard their IP PINs and to provide the number only when their tax returns are completed and are being filed. This advice can create issues for preparers and puts them on notice to be vigilant when using and revealing these numbers.
As IP PINs are still relatively new, many taxpayers might not fully understand their implications for filing returns and may misplace the IRS notice. In these situations, and while the online tool remains unavailable, a taxpayer will need to call the IRS Identity Protection Specialized Unit at 800-908-4490.
Furthermore, safeguarding information and client proof of identity is becoming even more important. The IRS advises preparers to verify two forms of identity proof plus taxpayers' and dependents' Social Security or, if applicable, other taxpayer identification numbers and, upon request by the IRS in an investigation, to make available such information and documents (see IRS Publication 1345, Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns, "Safeguarding IRS e-file From Fraud and Abuse."
Tax fraud can affect anyone, including taxpayers' dependents and spouses. If only one member of a family is affected and given an IP PIN, then only that person's IP PIN is required. The other members of the family do not need to obtain numbers. However, any individuals, including any dependents, listed on a return who have been issued IP PINs must have their numbers included on any returns, or the entire return will be rejected when e-filing.
However, certain forms do not require the IP PIN and will not cause the filing to be rejected if it is not included. These include Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return; Form 1040-ES, Estimated Tax for Individuals; Form 1040X, Amended U.S. Individual Income Tax Return; and Form 433-D, Installment Agreement. Additionally, paper returns will not be rejected outright if they are filed without including the IP PIN. Unfortunately, however, the IRS indicates that paper returns that do not contain the IP PIN will be substantially delayed due to the process of verifying the identities of the individuals on the return.
Due to the ever-evolving sophistication of identity theft fraud, the need to assure the privacy of client information is critical. Protecting against fraud, including by the proper use and protection of IP PINs, now demands more attention than ever before.
Stephen Hammel and Sebastian Murolo are both assistant professors at Queensborough Community College in Bayside, N.Y.
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