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Business Tax Identity Theft

Most consumers are familiar with identity theft. It occurs when someone uses your identity to make purchases or obtain credit without your knowledge or consent. However, fewer people are aware that businesses also fall victim to identity theft and it most commonly involves taxes.

A business EIN (federal employer identification number) is a business’ Social Security Number. It is frequently used to uniquely identify the business and is required for bank accounts, loan and credit accounts, merchant credit card processing accounts, state and federal tax filing, and other business activities. Despite this, EIN’s are not given the same protections as Social Security Numbers, creating risk because fraudulent accounts can be opened with just a business name, address, and EIN.

Fraudsters targeted a Captain D’s seafood restaurant franchise in Atlanta, Georgia. Using the business' EIN, they created more than 100 fake W-2 forms to report in excess of $4 million in non-existent salaries to state and federal agencies.

As a result, the unsuspecting business owner was later surprised to be notified of a tax deficiency and advised that he owed more than$800,000 in unpaid payroll taxes.

One common misuse of a business EIN is using it to report false income and file for a tax return. Treasury Inspector General for Tax Administration reports that the IRS could be issuing more than $2.3 billion in potentially fraudulent tax refunds based on stolen or falsely obtained EINs each year. This figure is expected to grow to $11.4 billion per year over the next five years. According to Government Accountability Office, the IRS blocked about $24 billion in fraud attempts involving two million incidents last year alone. In other words, like personal identity theft, business tax fraud is a big and booming business.

Luckily, there are some actions businesses can take now to minimize risk:

  • Create and monitor business information security policies and limit employee access to sensitive business information to those with critical “need to know.”
  • Know who to notify in the event of tax identity theft, including local law enforcement, the IRS, and the FBI if the action involved a data breach.
  • Develop an action strategy for dealing with tax identity theft including outreach to legal counsel, employee communications, and documentation of procedures.
  • Routinely monitor business account activity with the IRS and state and local tax agencies.

Sadly, potential for tax identity theft and other risks are a part of doing business in the modern world. Your best defense is to be aware of potential problems and implement processes to protect your interest.