Inactive EINs used to commit identity theft and tax fraud
The Internal Revenue Service needs to do more to prevent inactive Employer Identification Numbers from being used to commit business identity theft and tax fraud, according to a new government report.
The report, from the Treasury Inspector General for Tax Administration, raised fresh concerns about the IRS’s issuance of EINs and the use of EINs on business tax returns for fraud, after TIGTA has warned the IRS about the abuse of EINs in the past. In response to previous reports, the IRS developed filters and other processes to catch fraudulent activity. As a result, the IRS reported that between Jan. and June 1, 2017, it identified approximately 10,000 business returns showing signs of identity theft, with the associated refunds totaling $137 million.
However, TIGTA believes further action is needed. TIGTA found that programming errors resulted in the incorrect assignment of more than 227,000 EINs to sole proprietors who either already had an EIN or were deceased according to IRS records. Application screening filters and processes also need to be improved to ensure applicants aren’t abusing the system, according to the report.
TIGTA found the processing of paper EIN applications resulted in a high number of errors and inefficient resource use. Based on a statistical sample of 206 EIN applications, 66 applications (or 32 percent of them) contained one or more processing errors. Based on the results of that sample, TIGTA estimates the IRS potentially inaccurately processed 20,867 paper EIN applications.
“Business identity theft is a growing threat to tax administration,” said TIGTA Inspector General J. Russell George in a statement. “As such, it is essential that the IRS develop processes to continue to reduce the risk of fraudulent use of EINs and strengthen the EIN application process.”
TIGTA made 18 recommendations in the report, such as expanding the IRS’s fraud filters, placing a special indicator on the tax accounts associated with some EINs, and to correct the IRS’s programming to reject EIN applications when an EIN has previously been assigned to the same sole proprietor and to reject applications when the sole proprietor is deceased. The report pointed out the IRS has some data that can be used to proactively identify EINs assigned to individuals who may pose a risk to tax administration. The data includes a list of individuals or businesses used as responsible parties for businesses previously determined to be fictitious by the IRS.
IRS management agreed with 15 of TIGTA’s recommendations and plans to take corrective actions, or has already taken them. However, the IRS didn’t agree with three recommendations.
“The report indicates that the processing of paper filed EIN applications resulted in a high number of errors and inefficient use of resources,” wrote Kenneth Corbin, commissioner of the IRS’s Wage and Investment Division. “While we agree that processing paper filed applications could result in processing errors, processing that requires manual input will always have a high level of risk; however, this service continues to meet or exceed our quality goals.”