_Protecting High-Net-Worth Clients from Tax Fraud_ Lessons from a Costly Scam

1. High-Stakes Tax Fraud: A Venture Capital Client’s Struggle with Identity Theft One advisory firm’s high-income venture capital client, accustomed to substantial financial gains, is now facing a crisis. After filing for a tax extension in April 2024, they waited until October 13th to receive their final K-1s and submitted their return on October 15th—only to have the IRS reject it. The reason? A return had already been filed in their name, though they had never submitted one. The stakes are high, with an $800,000 refund now in jeopardy. Read Full Article Here: Financial Advisors: Prevent Tax Fraud with Fintech Solutions “An $800,000 return is significant, but for this client, it’s not unusual,” said the advisor, who requested anonymity to protect other clients from potential targeting. “The IRS likely didn’t flag it because the client—a private equity and venture capital investor—regularly experiences large fluctuations in income. Their earnings are unpredictable, with major capital gains some years and minimal activity in others. To the IRS, this return seemed consistent with past filings.” Now, they are in limbo, waiting for the IRS to investigate and determine the fate of the substantial refund. In the meantime, the client has taken precautionary steps by freezing their credit and implementing identity theft safeguards. However, uncertainty remains regarding how long the resolution process will take—or whether the refund will be recovered. The Rising Threat of Data Breaches How did this happen? In early 2024, National Public Data (NPD) suffered a data breach that exposed 272 million taxpayer identification numbers (TINs). This breach is alarming due to the sheer volume of TINs leaked, along with associated personal information such as names, addresses, and phone numbers. Additionally, NPD inadvertently compromised passwords to internal systems, granting hackers access to vast amounts of sensitive taxpayer data. The NPD incident is not an isolated event—multiple high-profile breaches have occurred, creating an ongoing

2. security crisis. This persistent threat highlights the critical need for heightened data protection measures. The Risk of Fraudulent Tax Filings Post-Breach One of the most concerning consequences of identity theft following the NPD breach is the increased risk of fraudulent tax filings. Criminals with stolen taxpayer identification numbers can submit fraudulent returns early in the tax season, often securing refunds before the legitimate taxpayer even files—precisely what happened in this case. By the time the IRS identifies the fraud, the refund has already been issued to the scammer. Now, the taxpayer and their advisor must navigate a complex IRS investigation to resolve the issue and reclaim the lost funds. Proactive Measures for Financial Advisors to Protect Clients from Tax Fraud Financial advisors play a crucial role in helping clients defend against tax-related identity theft. Effective protection strategies involve a combination of strong security measures, ongoing fraud awareness, and vigilant account monitoring. Here are key steps advisors can recommend to strengthen client defenses: Enhancing Security Measures: Encourage clients to use unique, complex passwords and enable multi-factor authentication on financial accounts to prevent unauthorized access. Reviewing IRS Notices: Advise clients to carefully examine all correspondence from the IRS, as early warnings of fraudulent activity often come in the form of official notices. Monitoring Financial Activity: Recommend regular monitoring of bank and credit accounts to detect suspicious transactions that could indicate broader fraud risks. Filing Early: Encourage clients to submit their tax returns as soon as possible to prevent fraudsters from filing first.

3. Using the IRS IP PIN Program: The IRS Identity Protection Personal Identification Number (IP PIN) program provides an additional security layer, preventing others from filing false returns under a taxpayer’s Social Security number.