IRS Expands Campaign Against Identity Theft, Tax Fraud

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By Michael Trimarchi

Two-factor authentication for email accounts should be applied by payroll and tax professionals, who also should be vigilant in recognizing suspicious electronic correspondence, according to an action plan announced July 10 by government agencies.

As part of an expanded awareness campaign, the Internal Revenue Service and its Security Summit partners developed a six-point action plan that discussed antivirus computer software, network firewalls, two-factor identity authentication, backup software and services, encryption, and data-security plans.

The use of reinforced authentication to access email accounts is especially important, the IRS said, noting that many email providers offer customers two-factor authentication protections to access email accounts. “Tax professionals should always use this option to prevent their accounts from being taken over by cybercriminals and putting their clients and colleagues at risk,” the agency said.

Two-factor authentication requires users to enter registered credentials, such as a user name and password, along with a security code usually sent in a text message to a mobile phone. “The idea is a thief may be able to steal the username and password but it’s highly unlikely they also would have a user’s mobile phone to receive a security code and complete the process,” the IRS said.

The IRS issued a new four-page guide, Publication 5293, “Data Security Resource Guide for Tax Professionals,” which highlights a compilation of resources for tax preparers, and revised Publication 4557, “Safeguarding Taxpayer Data,” to better reflect ongoing threats to tax professionals, the agency said. The publications promote basic security steps endorsed by the Security Summit.

Recommendations from the summit included learning to recognize phishing emails, especially those that appeared to be from the IRS, tax agencies, and providers of business software and computer cloud storage. Suspicious emails and attachments should not be opened, the summit said. “Remember: The IRS never initiates initial contact with a tax professional via email,” the summit said.

Phishing, which was first raised as a concern by the IRS in early 2016, is a practice that uses fake emails that are sent to those who have access to payroll data. The emails purport to be from a high-level company official seeking information about Forms W-2, Wage and Tax Statement. Cybercriminals, in attempting to file fraudulent tax returns for refunds, try to trick workers into disclosing employee names, Social Security numbers, and income information.

In early 2018, cybercriminals breached a number of practitioner offices by remotely controlling access to computers and stealing taxpayers’ 2016 information, the IRS said. “The thieves used that information to file 2017 tax returns using all the taxpayer real data, including their bank accounts for direct deposit,” the agency said.

“The thieves then called the taxpayers, trying to trick them into returning the fraudulent refunds,” the IRS said. “In some cases, the thieves had stolen so much information, they could access the clients’ bank accounts online and steal the fraudulent refunds. In many cases, the tax professionals never even knew their client data was stolen.”

The IRS reported that in the first four months of 2017, about 870 organizations reported that they received a W-2 phishing email, up from about 100 organizations in the comparable period in 2016, the agency said. About 200 of the 870 organizations lost data, up from about 50 in 2016, the IRS said.

In 2016, the IRS started a verification-code pilot program for Forms W-2 in an effort to thwart identity theft and tax fraud. The program uses a 16-character code to authenticate employee data and match individual tax returns with the proper refund amount. Participating payroll service providers include the code in Box 9 of copies B and C of employees’ Form W-2 that are filed electronically. The verification program is expected to be renewed for the 2019 filing season.

The Security Summit, which was formed in 2015, combines the IRS with representatives of the software industry, tax-preparation firms, payroll and tax financial product processors and state tax administrators to combat identity theft refund fraud.

To contact the reporter on this story: Michael Trimarchi in Washington at mtrimarchi@bloombergtax.com. To contact the editor responsible for this story: Michael Baer at mbaer@bloombergtax.com.

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