The IRS, state tax agencies, and the nation’s tax industry warn small businesses to be on-guard against a growing wave of identity theft against employers.

Small business identity theft is a big business for identity thieves. Just like individuals, businesses may have their identities stolen and their sensitive information used to open credit card accounts or used to file fraudulent tax returns for bogus refunds.

In the past year, the IRS has noted a sharp increase in the number of fraudulent Forms 1120, 1120S, and 1041, as well as Schedule K-1. The fraudulent filings apply to partnerships as well as estate and trust forms.

Identity thieves are displaying a sophisticated knowledge of the tax code and industry filing practices as they attempt to obtain valuable data to help file fraudulent returns.

Security Summit partners have expanded efforts to better protect business filers and to better identify suspected identity theft returns.

Identity thieves have long made use of stolen Employer Identification Numbers to create fake Forms W-2 that they would file with fraudulent individual tax returns.

Fraudsters also used EINs to open new lines of credit or obtain credit cards; now, they are using company names and EINs to file fraudulent returns.

Know the Warning Signs

As with fraudulent individual returns, there are certain signs that may indicate identity theft. Business, partnerships, and estate and trust filers should be alert to potential identity theft and contact the IRS if they experience any of these issues:

  • Extension to file requests are rejected because a return with the Employer Identification Number or Social Security number is already on file
  • An e-filed return is rejected because of a duplicate EIN/SSN is already on file with the IRS
  • An unexpected receipt of a tax transcript or IRS notice that doesn’t correspond to anything submitted by the filer
  • Failure to receive expected and routine correspondence from the IRS because the thief has changed the address
    The IRS has noted a sharp increase in the number of fraudulent Forms 1120, 1120S, and 1041, as well as Schedule K-1.

New Procedures to Protect Business in 2018

The IRS, state tax agencies, and software providers also share certain data points from returns, including business returns, that help identify a suspicious filing.

The IRS and states also are asking that business and tax practitioners provide additional information that will help verify the legitimacy of the tax return.

For 2018, these “know your customer” procedures are being put in place that include the following questions:

  • The name and SSN of the company executive authorized to sign the corporate tax return. Is this person authorized to sign the return?
  • Payment history—Were estimated tax payments made? If yes, when were they made, how were they made, and how much was paid?
  • Parent company information—Is there a parent company? If yes, who?
  • Additional information based on deductions claimed
  • Filing history—Has the business filed Form(s) 940, 941, or other business-related tax forms?

Sole proprietorships that file Schedule C and partnerships filing Schedule K-1 with Form 1040 also will be asked to provide additional information items, such as a driver’s license number. Providing this information will help the IRS and states identify suspicious business-related returns.

Resources

For small businesses looking for a place to start on security, the National Institute of Standards and Technology produced Small Business Information Security: The Fundamentals. NIST is the branch of the U.S. Commerce Department that sets information security frameworks followed by federal agencies.

The United States Computer Emergency Readiness Team has Resources for Small and Midsize Businesses. Many secretaries of state also provide resources on business-related identity theft as well.

The IRS, state tax agencies and the tax industry are working together to fight against tax-related identity theft and to protect business and individual taxpayers.

Everyone can help. Take steps recommended by cyber experts and visit the Identity Protection: Prevention, Detection and Victim Assistance page for information about business-related identity theft.


For more information, view the webinars in CBIA's cybersecurity series on demand and download the Small Business Cybersecurity Workbook, from CBIA and the Connecticut Small Business Development Center.