By ARDEN DALE
Financial advisers are seeing more of their clients fall victim to tax-identity theft, which the Internal Revenue Service calls a growing problem.
But until recently, many advisers had little experience with the fraud, and even those who haven’t dealt with it first-hand are hearing more about it from colleagues.
Thieves use someone else’s social-security number to file a bogus tax return that claims a refund. It costs victims time and money if they get drawn into administrative hassles with the IRS to straighten out their records and collect their rightful refunds.
Accountant Scott Kaplowitch, a partner at accounting and financial-planning services firm Edelstein & Co. LLP in Boston, saw his first case last summer after 20 years in practice. The IRS wrote to a client, saying the agency was suspicious because someone had filed for a tax refund using his social-security number.
“I don’t know how they knew [to flag the refunds],” Mr. Kaplowitch said.
Fortunately, the agency had refused a refund to the thief, so Mr. Kaplowitch didn’t have to go through the lengthy bureaucratic nightmare that follows when the IRS pays a refund to a fraudster. Victims can spend months or even years cleaning up their cases.
It took Florida accountant Byron Shinn eight months to help a client get back his money after thieves walked into a tax-preparation shop in California armed with the man’s social-security number and walked out with a $7,000 refund.
Mr. Shinn, who has an accounting firm in Bradenton and works with many advisers and their clients, has talked with lawmakers about tax-identity theft. He also works with local Florida law enforcement to try to stop the fraud, which is rampant in the state. He noted that many wealthy seniors now living in nursing homes are easy targets.
The National Taxpayer Advocate, an IRS watchdog group, got 55,000 requests for help with tax-identity theft in 2012. The group has seen a 650% rise in the number of identity theft cases it handles since 2008. And the IRS since last year has doubled to 3,000 the number of staffers working on such cases.
The elderly are often victims, but the young can be targets as well. Mr. Shinn is working with two clients, both high profile litigators–one in Tampa and the other in Sarasota–who filed 2011 returns that claimed their college kids as dependents. The IRS rejected the returns because it had already received others for the kids, which turned out to be bogus.
Besides turning into a major administrative hassle, the fraud caused a hitch in the clients’ overall financial plans. One of the lawyers was waiting for a $12,000 tax refund, and the other for a $30,000 refund. Both planned to use their refunds to help pay their 2012 taxes, but had to come up with money from other sources to cover the gap.
“Every one of these clients is upset and venting–I want to pay for my cruise, do this, do that,” said Mr. Shinn. “I’ve got to deliver the bad news.”
Mr. Shinn recommends that clients protect themselves with special identification numbers available from the IRS. An ID number lets a taxpayer show he is the rightful filer of a return. In 2013, the IRS has already issued numbers to more than 600,000 taxpayers who’ve been the victims of identity theft–more than twice as many as in the previous year.
Martha Ferrari, vice president of financial planning at Halberstadt Financial Consultants Inc. in Princeton, N.J., said she plans to recommend her clients get the ID numbers. She has been hearing from adviser colleagues about more cases of tax-identity theft.
“I had heard of it but didn’t give it a lot of thought until now,” Ms. Ferrari said.
Write to Arden Dale at email@example.com