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IRS crackdown on fraud can spillover to honest taxpayers

The Internal Revenue Service (IRS) has increased its efforts to crackdown on fraud. The push began in 2015 when tax fraud was at "near crisis" levels. This caused the IRS to pair up with state officials in an effort to better detect false returns.

Has this push worked? The IRS’ collaboration with state officials along with use of software to flag suspicious returns has proven successful. Fraudulent returns dropped by 72 percent since 2015 

Unfortunately, the efforts are not without problems. The agency has mistakenly flagged honest taxpayers for fraudulent activity. In 2017, over 66 percent of investigations of returns flagged as fraudulent were honest taxpayers wrongly accused of fraud.

What if the IRS accuses you of filing a fraudulent return? If flagged for fraud, the IRS may ask additional questions to verify your identity. The agency generally requests this information with one of four forms: Letter 5747C, Letter 4883 C, Letter 5447C or Letter 5071C. Each letter provides information on the steps needed to resolve the issue. The difficulty to resolve the matter can range from fairly easy to much more involved. For example, the IRS’ Letter 5747C, requires the taxpayer to bring specific documents to an in-person appointment while Letter 5071C can be resolved either online or with a phone call.

If your answers do not satisfy the IRS, the agency will require additional action.

What is the takeaway lesson for taxpayers? Even a relatively simply interaction with the IRS to verify identity can become complex. If you are navigating a complicated tax issues, it is wise to seek legal counsel. An attorney experienced in IRS and state tax law audit issues can review the agency's request and better ensure your legal rights are protected

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