IRS Looks at New Twist in Credit Repair Fraud : Probe: Firms are allegedly advising debtors to use false Social Security numbers. The ploy is illegal.

The Internal Revenue Service said Wednesday that it is investigating a new kind of credit repair fraud that subjects people with poor credit to violations of federal tax laws and possible loss of Social Security benefits.

Potentially hundreds of people, particularly in Southern California, paid up to $1,500 for credit repair kits that instructed them to give the IRS a false Social Security number, in violation of federal tax law. People who used the kits were told that they could use the false Social Security number to obtain loans and credit cards, the IRS said.

The IRS said it is looking into the activities of more than four credit repair firms, including two based in California. It identified one as Credit One Services of Ft. Bragg, and it said another unnamed firm is based in Glendale.

“We are focusing our efforts in California, in particular Southern California, where this activity seems to be concentrated,” IRS spokesman Larry Wright said.

The IRS would disclose few details about Credit One, except to say it recently relocated from Woodland Hills. Telephone calls to its Ft. Bragg office on Wednesday were not answered. A spokeswoman for the California Secretary of State said the company was not incorporated in this state.

The IRS could not say how many people purchased the kits in a desperate attempt to clear their credit records but said victims were spread across the country, as far away as Florida, New Jersey and Pennsylvania.

According to the IRS, the companies peddle a bogus credit repair technique called “credit file segregation.” They tell consumers that they can cleanse their credit records by obtaining a nine-digit employer identification number from the IRS and substituting it for their Social Security number on tax documents, the IRS alleged. It said the firms told consumers that they could use the new number to obtain loans and credit cards.

Wright said people who change their Social Security number as the kits instruct are cheating themselves of future Social Security payments for the years they work. Of more immediate concern, he said, is that the victims of the fraud could be criminally liable for falsifying tax records. He said the promoters of the scheme could be liable for participating in a conspiracy to defraud the government.

The IRS asked people who used the kits to contact the agency and correct their tax filings to avoid possible prosecution later.

Wright said the IRS became aware of the alleged fraud after its computers began kicking out a noticeable number of tax returns for erroneous Social Security numbers. About the same time, the Better Business Bureau notified the IRS that it had received a large number of inquiries about the legality of the program promoted by Credit One, Wright said.

Lona Luckett of the Better Business Bureau in Cypress said her office has received 582 inquiries about Credit One, an indication that the problem is a huge one. “For every call that we receive, there are at least two that don’t get through,” she said.

Luckett said people who received Credit One solicitations had sought personal bankruptcy protection, an indication that the company is large enough to obtain access to court filings in many states.

Luckett said the bureau has processed seven complaints against the firm from consumers who did not receive kits, or did not receive refunds after determining the kits were--as one disgruntled customer wrote--”a package of garbage.”