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ABA Tax Section Urges Easing of IRS Barriers to Assisting Fraud Victims

Publication Date: 04/03/2012

Victims of tax fraud resulting from identity theft are often left frustrated by the Internal Revenue Service because of strict privacy rules that can hinder investigation, the American Bar Association Section of Taxation said in an April 2 letter to congressional tax writers.

The ABA tax section said IRS wastes its limited resources trying to carefully determine which information it is allowed to disclose to victims, but the net effect is that the information that is withheld is exactly what would be needed to help stop identity thieves.

“In order to alleviate these problems, Congress might consider the creation of a mechanism to allow certain disclosures of tax return, return information, and tax account information to taxpayers who are or who may be subject to the misuse of their taxpayer identification number,” the ABA tax section letter said.

The group recommended that Congress use a model already in place under tax code Section 6103(e) to treat taxpayers whose tax and/or personal identification has been misappropriated as parties with a “material interest,” which would allow IRS to disclose all information that has been posted to or associated with a taxpayer's account to the owner of the taxpayer identification number.

Under the existing rules, a taxpayer who has been victimized is likely to face problems because IRS employees are guided by detailed instructions in the Internal Revenue Manual that require them to adhere to specific disclosure steps when releasing account information.

As a result, “the very act of reporting a compromised identification number prevents the taxpayer from being able to obtain from the Service the information necessary to correct the erroneous information linked to that number,” the ABA tax section said.

“The Service did not create this Catch-22. Nothing in Section 6103 authorizes the disclosure to a taxpayer of the erroneous tax information.”

The group said the problem can be resolved if Congress would modify tax code Section 6103(e) to state that information shall be disclosed to the taxpayer upon request if it has been posted to or associated with a taxpayer's account.

Easing Barriers for Investigations

“A statutory provision authorizing the Service to make the necessary disclosures to the person whose identity has been misused will help remedy the present situation of stymied and incomplete resolution,” the letter said.

“It will relieve taxpayers of the painful and expensive guessing of what information was reported to the Service by a misuser and how that information may adversely impact them. The Service should have the tools available to assist the taxpayer who is the victim of identity misappropriation.”

IRS Deputy Commissioner for Services and Enforcement Steven Miller told the Senate Finance Committee March 21 that the agency is aware of the issues and is considering a variety of ways to try to ease some of the barriers to investigating fraud, such as possibly allowing victims to sign a waiver allowing the agency to share tax information with local law enforcement to help find identity thieves.

IRS is also working on improving employee training, increasing education and outreach efforts, and stopping fraud “at the door” through better safeguards in the agency's processes, he said.

The complete text of this article can be found in the BNA Daily Tax Report, April 3, 2012. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today. Learn more »

© 2012, The Bureau of National Affairs, Inc.