Tax Fraud Prevention Tips: Use of Stolen Business EINs

Tax Fraud Prevention Tips: Use of Stolen Business EINs

Tax fraud and tax identity theft are a growing crime epidemic. There are a plethora of reports regarding the hundreds of thousands of individual taxpayers nationwide who have had their tax refunds stolen by identity thieves each year. However, individuals are not the only ones who are being victimized in tax fraud schemes. Businesses are also being targeted.

As a business owner, imagine receiving a notice of deficiency, and a demand for immediate payment, of more than $800,000 in unpaid payroll taxes for more than 100 employees that have never worked for your company. That’s exactly what happened to a Captain D’s Seafood franchise owner in Georgia when thieves stole his business employer identification number, or EIN, and used it in a tax refund scheme to report more than $4 million in bogus salaries to the IRS and state tax agencies.

That business owner is not alone. Hundreds of thousands of businesses are being similarly victimized.

Business EINs used in tax fraud and tax refund schemes

The Treasury Inspector General for Tax Administration (TIGTA) examined this growing trend, and in September 2013 published an audit report entitled Stolen and Falsely Obtained Employer Identification Numbers are used to Report False Income and Withholding.” TIGTA estimated that the IRS may issue almost $2.3 billion each year in potentially fraudulent tax refunds based on stolen or falsely obtained EINs, and roughly $11.4 billion over the next five years.

In its report, TIGTA identified 767,071 electronically filed individual tax returns with fraudulent refunds based on falsely reported income and withholding in Tax Year 2011 alone, using 285,670 EINs for the reported wages and withholding. 8,046 of the EINs used were falsely obtained, while 277,624 of the EINs used had been stolen from legitimate businesses.

How and why the schemes work

In order to generate fraudulent tax refunds, criminals need to report fictitious wages and withholding on individual tax returns filed with the IRS. Because the IRS has processes in place to confirm that an EIN used is valid (actually issued by the IRS), thieves steal and use a valid EIN of an unsuspecting business.

They do not have to ever have been actually employed by the business, nor does the scheme require a validly issued Form W-2. With tax e-file services and software, they can simply enter the target business’ name, address, and EIN in an online form, submit the return electronically, and collect the resulting fraudulent refund. This process can be repeated numerous, even hundreds, of times using stolen or synthetic identity information of multiple persons. The result is the creation of an ever- increasing and potentially significant tax liability for the targeted business.

The scheme often works because the IRS might not have access to third-party reported Form W-2 information at the time an individual tax return is processed. In other words, this means it is not able to verify and match the income and withholding reported on the individual tax return with the information reported by the employer.

The IRS does not begin to receive and match employer-reported wage and withholding information until after the January 31st deadline for W-2 distribution. Knowing this, criminals routinely file their fraudulent returns as early as possible, so they can receive their fraudulent refunds before the IRS has a chance to receive the information and complete its matching process.

The target business from which the EIN was stolen and misused is completely unaware of the fraud until the IRS and state tax agencies realize there is an apparent tax deficiency, because the amounts reported and paid by the employer do not match what has been calculated to be owed as a result of the fraudulent information reported on the individual tax returns. Depending upon how many times the business’ EIN was utilized, the erroneous deficiency can be tens or even hundreds of thousands of dollars.

The victimized business suddenly receives an unexpected notice of deficiency and demand for payment, and must then attempt to prove to the IRS, state tax agencies, and the Social Security Administration that a fraud has occurred.