Bamboozled January 23, 2016: Why the IRS wants your license: to drive down identity theft

You’re probably going to be asked to present your driver’s license when you file your tax returns.

But New Jersey taxpayers don’t have to give it, although there seems to be a bit of confusion on the topic.

There are a lot of hiccups in this new development, which is meant to lower the chances of fake returns being filed in your name.

We hope this column with bring some clarity.

Let’s go over a little history.

Reports last year said the IRS estimated that refund fraud would hit $21 billion by 2016, up from $6.5 billion in 2014. That’s a massive problem.

The IRS couldn’t confirm those numbers, but it did say in calendar year 2015, through November, the IRS rejected or suspended the processing of 4.8 million suspicious returns.

“So far, we stopped 1.4 million confirmed identity theft returns, totaling $8 billion,” spokeswoman Patricia Svarnas said. “Additionally, through November we stopped $2.9 billion worth of refunds in other types of fraud. That’s a total of $10.9 billion in confirmed fraudulent refunds protected.”

Refund fraud happens when a scammer uses your private information to file a tax return in your name before you do, and they get back a chunky refund. By the time you file your own return, that scammer is long gone and the IRS and state will take a whole lot longer to process your real returns.

It’s meant longer delays for legitimate taxpayers to get their refunds as the government has ramped up anti-fraud measures to make sure returns are legitimate. Plus, affected taxpayers need to deal with the headache of identity theft.

Tax agencies and industry organizations have been trying to devise methods to cut down on fraudulent returns, and one answer was to use a driver’s license as added identity authentication.

The IRS web site says its goal is to verify a taxpayer’s identity and the validity of a return before it is processed.

There are a lots of new behind-the-scenes safeguards, the agency said, and requesting a driver’s license one new approach.

The IRS called the move one more layer of protection against identity thieves because some crooks may already have your Social Security number and other identifying information, but they may not have your driver’s license number.

You do not need a driver’s license to file your federal return, the IRS said.

It’s voluntary.

Then there are state returns.

“Some states may request your driver’s license number for state tax returns because they have the ability to match state records and help confirm your identity,” the IRS said.

For New Jersey returns, adding your driver’s license information will be optional when filing electronically, said Treasury Department spokesman Joseph Perone,

“While the Division of Taxation does not currently have access to driver’s license information, the use of this information ultimately will provide the Division with another means to validate legitimate refunds so they can be issued without further delay,” Perone said.

THOSE HICCUPS

It seems not all tax software programs are clear on what’s required and what’s not, making the driver’s license issue a little muddled.

The Federation of Tax Administrators, which represents state tax agencies, confirmed that almost every state, and the IRS, is requesting the number, although it is not mandatory.

What is mandatory, though, is for all tax software programs to request a driver’s license number unless a state has opted out, said spokeswoman Verenda Smith.

“The software companies are required to ask for it, but the taxpayer has the option of not giving it,” She said. “They can say, ‘I don’t have one,” or ‘I don’t want you to have it.'”

But how can taxpayers say no? That depends on the state, and on exactly how the software programs for each state have been modified.

Smith said in Alabama, taxpayers or tax preparers must enter something into the driver’s license field. If someone doesn’t have a license or doesn’t want to share the number, all zeros can be entered instead.

Some tax preparers in New Jersey reported to the New Jersey Society of CPAs (NJCPA), an industry group, that some software programs are requiring the driver’s license numbers for New Jersey returns despite the “not mandatory” status for license information.

NJCPA spokesman David Plaksow did some checking, and he said he found the “major” software packages seem to allow you to move on to the next step without entering anything for the license number.

“That’s not to say there might not be the odd software package out there that does require something,” he said.

We asked Taxation about this, and the agency said it has also been told that some tax preparation software may require driver’s license information. But, spokesman Perone said, the division will send a reminder to all tax preparation software companies this year that driver’s license information is optional for a New Jersey income tax return.

Tax experts agreed this new addition to tax return software is fluid, with changes and modification still going on, so, dear readers, let us know what happens when you file your state return, especially if you don’t want to give your license, or you don’t have one.

Also let us know if entering all zeros will work.

And we wonder: if some software programs are requiring the driver’s license number, what happens if someone doesn’t have a license?

You might need to switch to a different program or tax preparer if you’re asked for your number and you have one, or you don’t want to give it.

SHOULD YOU SHARE IT?

Seems this will be a tax season of trial and error, so keep us posted, readers.

Smith of the Federation of Tax Administrators said sharing a driver’s license will be a first for people in many states.

“This is a numbers game and the goal is as thoroughly as possible to verify the legitimacy of as many returns as possible so the remaining resources can be applied to fewer questionable returns,” Smith said. “The driver’s license is one good tool in that arsenal.”

Bamboozled agrees that yes, this is one time when it makes sense to share your driver’s license.

And importantly, this development adds serious ammunition to the argument that everyone should keep their driver’s license number protected.

Bamboozled has been an advocate of keeping your driver’s license and its bar codes safe from scanners, whether in a store when you make returns or at your doctor’s office.

If licenses are being used to help verify your identity when you file your taxes, well, that’s another reason to protect your driver’s license number.

Imagine if an identity thief has your Social Security number and your driver’s license number?

Not pretty.

So when you file your tax return, consider sharing your license number.

“If you’re willing to share your name and Social Security number and your income and all of the rest of that, which of course you’re required to do — sharing the driver’s license is given the same absolute protection as all the rest of your data,” Smith said.

If using a driver’s license number will allow the tax agencies to identify your real identity faster — and identify fake returns filed in your name — we give that a thumbs up.

Have you been Bamboozled? Reach Karin Price Mueller at Bamboozled@NJAdvanceMedia.com. Follow her on Twitter @KPMueller. Find Bamboozled on Facebook. Mueller is also the founder of NJMoneyHelp.com. Stay informed and sign up for NJMoneyHelp.com’s weekly e-newsletter.

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