New IRS Identity Verification Requirement - How to Comply And What This Means For Overseas Americans
Ines Zemelman, EAJan-25-2017
Starting from the 2016 tax year, the IRS and state revenue agencies require tax practitioners to verify client identity and to document the methods used.
“Just doing my job” - Please do not get angry with your tax preparer. The IRS, in an effort to tackle identity theft, is stepping up compliance efforts and requiring identity verification on tax returns. Tax practitioners must now complete a ‘due diligence’ form, submitted with the tax return, indicating that the client identity was verified, and which methods were used to do so.
Why does the IRS need my driver license?
Aside from cracking down on identity fraud, the concealed goal of this process is to identify taxpayer state residency. The primary documentation method is Driver License or State Issued Id. The latter is similar to a driver license, but you don't need to take a driving test. A non-driver State ID can be used as "proof of identity."
- Details of Driver License or State ID are entered in the federal tax return, and this information will be passed on to the state that issued the document. Sharing of information with the state occurs regardless of whether a state tax return is filed.
Importantly - not all U.S. expats residing abroad have state tax filing requirements. Many states accept foreign assignment as a valid reason for interruption of state residency.
Therefore, we do not require that you upload a U.S. Driver license.
You may be fully entitled to avoid filing a state tax return, but providing a US driver license with your tax return may open up a can of worms and require you to (correctly) argue that you do not need to file a state tax return. To avoid this headache, use alternative forms of verification we describe below.
Are there any other methods to verify my identity besides a US driver license?
The IRS accepts alternative methods of identity verification, such as a utility bill, statement from financial institution or credit card billing statement. It is OK if the document shows a non-US address; we recommend the document corroborates the address used on your tax return. Passport (US or foreign) is acceptable as well.
Importantly - employer-produced documents reporting income do not qualify for identity verification.
Acceptable documents are:
- US Driver License
- US State Issued Identification Card
- Financial institution account statement
- Utility Bill
- Credit Card Statement
Can I skip this whole ordeal? This seems intrusive.
Not completing the identity verification information will make e-filing impossible. Tax returns filed on paper without identity verification will likely be delayed in processing and the IRS will send a follow up request for an identity verification document.
If you do have a state tax filing requirement, please note that there some states that do not allow electronic filing without a U.S. driver license verification.
Is this required for prior years?
No - Identity verification for tax returns prior to 2016 is not required.
Where will this information go? Will this increase the odds of getting audited?
According to the IRS, the information will stay within the IRS and the states. The document verification is not related to the odds of an audit. In an age of increased identity theft, these new measures are an attempt to identify patterns indicating that the return may be fraudulent and filed by someone other than the taxpayer.