Recognizing Identity Theft Red Flags in Your Tax Practice

As a tax professional, you're in a unique position to spot signs of identity theft. Criminals often target the tax system to steal refunds, and the information that crosses your desk can reveal fraudulent activity if you know what to look for. Understanding these red flags can protect your clients and prevent your practice from being used unwittingly in fraud schemes.

Inconsistencies in Client Information

Pay attention when information doesn't add up. A W-2 showing income from an employer in a different state than where the client lives, unfamiliar employers that the client doesn't recognize, or income amounts that don't match what the client expected can all signal that someone has been using the client's Social Security number.

Address changes can also be red flags. If a client's address has changed and they didn't initiate the change, or if documents are being sent to an address the client doesn't recognize, investigate before proceeding. These could indicate that someone is trying to redirect the client's tax refund.

IRS Notices and Rejections

When a return is rejected because a return has already been filed using the client's Social Security number, identity theft is a strong possibility. Similarly, if a client receives an IRS notice about income they didn't earn or about a return they didn't file, these are clear warning signs.

Don't dismiss these notices or rejections as simple errors. They require investigation. Help your client understand the potential implications and guide them through the appropriate response, which typically includes filing an identity theft affidavit with the IRS.

Client Behavior Changes

Sometimes identity theft is signaled by unusual behavior from someone claiming to be your client. If a long-standing client suddenly communicates very differently, requests unusual changes, or seems unfamiliar with their own financial history, be cautious. Criminals sometimes impersonate legitimate clients to gain access to their information or change account details.

New client inquiries can also raise concerns. Be wary of potential clients who are evasive about their identity, can't answer basic questions about their financial situation, or push for unusually fast processing. While these could be legitimate people in unusual circumstances, they could also be fraudsters.

Document Irregularities

Look carefully at the documents you receive. Forms that appear altered, inconsistent formatting that differs from what the issuer typically produces, or information that doesn't match across related documents can indicate fabrication. If something looks off about a document, verify it with the issuer before using it to prepare a return.

Digital documents deserve extra scrutiny because they're easier to manipulate than paper. Embedded metadata, image quality inconsistencies, or text that appears overlaid on a document can all suggest tampering.

What to Do When You Spot Red Flags

When you notice something concerning, stop and investigate before proceeding. Ask the client about the discrepancy—there may be a legitimate explanation. If the client is unaware of the issue, help them understand what might be happening and the steps they should take.

For suspected identity theft, clients should file Form 14039 (Identity Theft Affidavit) with the IRS and consider placing fraud alerts or credit freezes with the credit bureaus. If the situation is complex or involves significant amounts, suggest they consult with an attorney who specializes in identity theft.

Protecting Yourself and Your Practice

Document your observations and communications. If you later need to demonstrate that you exercised appropriate care, having records of what you noticed and how you responded is valuable. Follow your instincts—if something feels wrong, it's worth investigating.

Ensure your own verification procedures are robust. Know your clients, verify their identities appropriately, and be skeptical of communications that seem unusual even if they appear to come from known clients. Criminals target tax preparers precisely because of the sensitive information you have access to.

Contributing to a Safer System

By being vigilant about identity theft, you're protecting more than just individual clients. You're making it harder for criminals to exploit the tax system, which benefits everyone. Report suspicious activity to the IRS when appropriate, and share information about new tactics you encounter with professional associations and colleagues.

The tax community's collective vigilance is one of the best defenses against fraud. Your attentiveness can stop theft before it happens and protect clients who might otherwise become victims.