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Last week, a television news station in Indiana ran an exposé allegedly revealing a new kind of identity fraud aimed at taxpayers. The report alleged that illegal immigrants were using stolen Social Security Numbers for tax-related purposes and not only does the Internal Revenue Service (IRS) know about the fraud, there is a "secret IRS policy" to encourage and hide the fraud from taxpayers.
The report drew a lot of interest because fraud! Illegals! IRS! Secret! Policy! All of the buzzwords. The report was read pretty extensively and passed along via social media - which is how it ended up in my lap. Financial planner (and 2015 Forbes Money Master) Michael Kitces tweeted the story to me, copying Kay Bell.
(You can read Kay Bell's response here.)
It's not a pretty story. Identity theft is concerning - and evidence suggests that it's getting worse, not better. Specifically, high profile cases involving the IRS (improper access of taxpayer accounts using the "Get Transcript" app); the Office of Personnel Management (21.5 million federal employees had their Social Security numbers and other data stolen) and, of course, the health insurer Anthem (potentially 80 million customers affected by a security breach), have heightened fears about how much data is available to the bad guys - and how easy it can be to get it.
But let's pull the curtain back a little. We know that identity theft is a big problem: a 2015 study found that there were 12.7 million victims of identity theft in the U.S. in 2014. That works out to a new identity fraud victim every two seconds. Identity theft has topped the list of consumer complaints made to the Federal Trade Commission (FTC) for the last 15 years. And, of course, identity theft has claimed the top spot on the IRS' Dirty Dozen list for several years running.
So yes, identity theft is a problem. But do I think IRS is in any way driving identity theft? No. Do I think IRS has a policy that encourages identity theft? No. Do I think IRS is doing a terrific job to curtail identity theft? No. Those answers are not at odds with each other. Here's the dilemma. By law, U.S. taxpayers are supposed to report and pay tax on all income unless otherwise excluded. It doesn't matter if you're here legally or not: you still report and pay. It doesn't matter if your income is earned legally or not: you still report and pay.
Those laws, as you can imagine, make it difficult for those who are not in this country legally and for those who are not earning income through legal means. And maybe you think that's a good thing. But here's the important part: folks who are not here legally are earning money and using services. They should be paying in. Whether you want them here or not isn't important in terms of collecting revenue and spending money. They're already here and if you're here - legally or not - you need to pay your taxes.
In order to file your taxes, you need either a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN). For years, ITINs were handed out all too easily. According to a 2012 study by the Treasury Inspector General for Tax Administration (TIGTA), there was significant potential for "the improper assignment of ITINs to individuals who have not substantiated their identity or foreign status." The process, TIGTA suggested, was flawed. Of the 1,638,737 ITINs assigned between January 1 and December 31, 2011, TIGTA found that supporting documentation such as work papers was certified by a Certifying Acceptance Agent only about a quarter of the time. There was, alleged TIGTA, a lack of oversight which contributed to widespread fraud. The answer? A rule change. Now, it's a little more difficult to get an ITIN and it's no longer permanent: it's a hoop you have to jump through more than once.
The sole purpose of an ITIN is to file a tax return. To file a tax return, you generally need to earn money. To earn money, you have to get a job. And to get a job, you need a Social Security Number. Why? Because as federal agencies crack down on illegal workers, they are increasingly auditing forms I-9 (downloads as a pdf) and other employment data. And you know what it asks for on a form I-9? A Social Security Number. Not an ITIN. To be clear, an ITIN does not provide legal immigration status nor does it provide work authorization.
A Social Security Number, however, is required for a form I-9. And if you can't get one? You "borrow" one (often from someone you know - like a family member - who has one already). You steal one. Or you buy a stolen one. The latter is mostly likely. The reality is that most of the folks who illegally obtain a Social Security Number aren't hacking into your Wi-Fi to do it. They're getting it from someone else (who, granted, might have hacked into your Wi-Fi to do it or snatched it up by some other means). But don't be fooled. Buying and selling data related to your identity isn't a one-off operation: it's an entire industry.
Employees know this. Employers know this. In fact, it's not unheard of in some employment sectors, like hospitality, for employers to assist in the cause. Early on in private practice, I was shocked to find out that employers sometimes illegally obtained blocks of Social Security numbers to assign to potential employees who couldn't obtain legal documents on their own; my older colleagues assured me that this was nothing new.
In fact, that busboy clearing your table? The line cook prepping your food? The janitor cleaning up after? If they are not working legally (and please don't assume that I'm suggesting that most are not), chances are that their employer knows this. And depending on geography and industry, there's also a good chance that not only does the employer know, the employer assisted in getting paperwork together so that they could work. Why? Because the employer needs low wage workers. And those employees were willing to work for low wages.
These hiring practices are not relegated to small businesses. In 2005, Wal-Mart agreed to pay an $11 million settlement following accusations that it used illegal immigrant labor for janitorial services; twelve businesses that provided contract janitor services to Wal-Mart were also part of the investigation and settlement. According to Department of Homeland Security, from 2009 to 2012, there were 9,140 administrative workplace inspections resulting in $31.2 million in civil fines imposed on employers who knowingly hired illegal workers. It's clearly an issue that isn't going away.
The WTHR report argues that IRS could mitigate some of the problem by being more diligent and more forthcoming. I think we'd all agree that IRS could be both. But to be clear, the IRS isn't handing out Social Security Numbers. That's the purview of the Social Security Administration. Neither is it the responsibility of the IRS to audit immigration papers related to employment. That's the purview of the U.S. Immigration and Customs Enforcement (ICE) as part of the Department of Homeland Security.
What the IRS is doing is processing tax returns and collecting revenue. When illegal workers file their tax returns during tax season, they're going to report their income together with an ITIN. But chances are that wage information as reported by their employer is reported using a bogus Social Security Number. The result? An ITIN/SSN mismatch. That, the report alleges, should be a red flag that something is wrong. I agree. But the jump from saying that IRS isn't doing enough to suggesting IRS is somehow pushing illegal workers to acquire and use stolen identities is a big one.
WTHR says that the "agency actually encourages undocumented immigrants to file with a mismatched Social Security number that does not legally belong to them." The first part of their statement is true: the IRS does encourage illegal workers to file a return because the law says they must. To suggest more is, I think, a stretch. When an employer reports income on a form W-2 or 1099 using a bogus Social Security Number, that may be criminal on behalf of the employer, employee or both. But finding/buying/using that Social Security number didn't start with IRS. And while IRS may be aware of a SSN/ITIN mismatch at filing season, not every mismatch is a crime or a clear indication of identity theft.
I reached out to IRS for their response to the report. They were predictably concerned about the implication that they were somehow complicit in identity theft cases. An IRS spokesperson released the following statement:
Identity theft protection is a top priority for the IRS. We’ve dramatically increased our efforts in this area to protect taxpayers and the tax system through prevention and detection of fraud and prosecution of thousands of criminals. The IRS administers the tax code, as written by Congress, which requires anyone who has earned taxable income to pay taxes if their income exceeds a certain threshold. The job of the IRS is to ensure that everyone who has taxable income, and has a filing requirement, has the ability to file a tax return and pay their fair share of taxes. We continue to look for other ways to help taxpayers and are currently reviewing the results of a pilot program looking at the use of Social Security numbers by other individuals for the purposes of obtaining employment.
I've been covering the results of identity theft for some time now. I've talked to many affected taxpayers, some of whom are also friends, family and clients, who have struggled with the consequences of having their identity compromised. Their reactions span the spectrum from scared to angry, frustrated to helpless. I've heard - and in some instances, watched in real time - the horror stories.
I've also talked with the IRS, including Commissioner Koskinen, and with the National Taxpayer Advocate, Nina Olson. I've reached out to individual tax preparers, companies that provide consumer tax preparation software, professional associations, security experts and individual taxpayers. They all agree that identity theft is a real problem. Not one person I've talked to has ever been dismissive of the consequences to taxpayers. And yes, like me, they think IRS could do more. Criticisms that IRS has been slow to react to an increase in identity theft fraud are certainly valid. The agency has focused on taxpayer privacy laws to a fault, leaving the impression that the focus was on protecting the privacy of the fraudsters, not the victims. It wasn't until this year that IRS announced, in a change of policy, that it would provide victims of identity theft with copies of the fraudulent tax returns filed using their personal and financial information; that change was in response to a request made by Sen. Kelly Ayotte (R-NH).
For its part, IRS has questioned where the resources to do more to protect taxpayers from identity theft are supposed to come from. Those IRS budget cuts are no secret. The IRS budget level for Fiscal Year 2015 of $10.9 billion was $1.2 billion less than it was in 2010: the IRS is now at its lowest level of funding since 2008. Those reductions - as IRS responsibilities (like overseeing Obamacare) have increased - haven't been helpful in the battle against tax fraud. And, I was reminded by an IRS employee, it's not their job to also police immigration. They can, I was told, only do so much.
That said, that doesn't mean IRS has given up, despite implications to the contrary. They are still working angles to stem identity theft, from increased emphasis on tax fraud from IRS Criminal Investigations (more on that in the coming days) to working within the industry. On Thursday, IRS will be providing an update with their partnership with the private sector (including companies like Intuit's TurboTax, H&R Block, Liberty Tax and Jackson-Hewitt). Check back here for a full report.
Additionally, as we move into tax season, you can count on the Forbes tax team for great coverage including news on identity theft concerns.
