The Federal Trade Commission's (FTC) “Red Flag” Regulations help protect consumers by identifying business practices that could result in identity theft. 

The regulations are referred to as “Red Flag Rules” because they require programs to be placed in operation by those affected businesses that will identify, detect, and respond to business practices or specific activities (referred to as “Red Flags”) that could result in identity theft. The programs must include procedures to protect against potential identity theft and provide a remedial procedure should identity theft occur. These rules apply to any company that extends credit to clients or accept credit and debit cards as payment for services. Since virtually every preparer extends credit at some time virtually all tax practitioners are affected by the “Red Flag” regulations.

What are Red Flags? - Applicable sections of the Fair and Accurate Credit Transactions Act of 2003 (FACTA), also known as the Red Flags Rule, define a red flag as a pattern, practice or specific activity that indicates the possible existence of identity theft. The regulations provide guidance by listing five specific categories of red flags:

1. Alerts, notifications or other warnings received from consumer reporting agencies or service providers such as fraud detection services.

2.  The presentation of suspicious documents.

3.  The presentation of suspicious personal identifying information, such as a suspicious address change.

4.  The unusual use of, or other suspicious activity related to, a covered account.

5.  Notice from customers, victims of identity theft or law enforcement authorities.

Each organization is responsible for coming up with its own list of Red Flags, and the list should be as exhaustive as possible. Unfortunately, there is no specific set of red flags for every business. Even though a business belongs to the same industry as another, it may have different Red Flags because of the manner in which the business is operated. Each business must include every situation that can be envisioned.