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The Color of Money

IRS needs to do a better job in 2009 of dealing with victims of identity theft

By Michelle Singletary
August 22, 2008
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Nina E. Olson, the official appointed to speak out on behalf of US taxpayers, has a few major gripes about the Internal Revenue Service.

Among them, she believes the agency needs to better protect victims of tax-related identity theft and should get more information out to homeowners about a new law that eliminates taxes on debt canceled as a result of foreclosure.

Olson reported to Congress, identifying areas of concern the IRS needs to focus on in the 2009 fiscal year - the 10th anniversary of the IRS Restructuring and Reform Act, which created the Office of the Taxpayer Advocate.

Here are three major areas Olson wants to focus on:

  • Tax-related identity theft. In one type of scam, a thief might file a return using a victim's Social Security number. The motive is refund fraud. If the real taxpayer files electronically, the IRS will automatically reject the return because the system accepts only one electronic filing per Social Security number.

    Olson faults the IRS for not having adequate procedures in place to assist victims of identity theft.

    To help alleviate this problem, the IRS is implementing a new identity theft indicator that tracks taxpayer accounts. Beginning in January, returns filed using Social Security numbers associated with accounts that are coded with a universal identity theft indicator will be filtered to help distinguish legitimate returns from fraudulent ones. Olson has concerns about the coding system.

    She recommended that the IRS create a centralized unit to handle identity theft.

  • Cancellation of debt income. When an individual or business borrows money and the debt is canceled, the borrower generally must include the amount of the canceled debt in gross income. This often-unexpected tax hit can affect borrowers who lose their homes to foreclosure or who default on car loans or credit card debts. Last year, Congress gave temporary tax relief to homeowners who had mortgage debt canceled, allowing a taxpayer to exclude from income qualified home loan debt forgiven in 2007, 2008, or 2009. The debt must have been used to buy, build, or substantially improve a principal residence and must have been secured by that residence.

    The problem: The tax relief isn't given automatically. You have to file IRS Form 982, "Reduction of Tax Attributes Due to Discharge of Indebtedness." Many people entitled to this tax break aren't filing the form.

  • IRS collection practices. Olson remains concerned about collection issues, including the seizure of assets before other collection alternatives have been exhausted.

    You can contact the taxpayer advocate service toll-free at 1-877-777-4778. For more information, go to www.irs.gov/advocate.

    Michelle Singletary is a columnist for The Washington Post. She can be reached at singletarym@washpost.com.

    © Copyright 2008 Globe Newspaper Company.
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