What’s your number? If you’re required to file certain business tax returns, the answer is an employer identification number, or EIN. The IRS assigns employer identification numbers when you file an application (generally Form SS-4). In fiscal year 2016, the IRS processed more than five million EIN applications, all at the Covington, KY processing center.
Because of rising concern about business identity theft, the treasury inspector general for tax administration issued a report on EIN application processing in February 2018. Here are questions based on that report.
Taxpayers can file for an employer identification number online, by fax, by phone, or by mail.
True or false — The IRS no long accepts applications via telephone for taxpayers with a legal residence, principal place of business, or principal office or agency in the US or US possessions.
The IRS requires all applicants to specify one of nine reasons for requesting an EIN. Those include starting a new business, banking purposes, change in type of organization, purchased a going business, hired employees, created a trust, compliance with IRS withholding regulations, created a pension plan, and “other.” According to the inspector general’s report, the most frequent reason for applying is that a taxpayer started a new business, and the second most frequent reason was “other.”
True or false — The third most frequent reason for applying for an EIN is the creation of a trust.
The IRS defines business identity theft as creating, using, or attempting to use a business’s identifying information without authority, in order to claim tax benefits.
Can you think of two ways an identity thief could use an EIN to get fraudulent refunds?
The inspector general reviewed EIN application data associated with more than 96 million assigned EINs as of February 9, 2017 and identified 206,920 EINs issued to sole proprietors who already had an EIN.
True or false — IRS procedures state that a sole proprietor should be issued only one EIN, regardless of the number of businesses the sole proprietor owns.
When the IRS processes an EIN application, businesses that will be required to file a business tax return are assigned a “filing requirement.” Denoting a business with a filing requirement allows the IRS to identify businesses that do not file a tax return when required. Once a business is identified as not having filed a required return, the IRS sends a notice to the business requesting the return.
The inspector general recommended that the IRS assign an indicator to those EINs issued without a filing requirement in order to identify which ones are later used to file (potentially fraudulent) tax documents.
The IRS disagreed with this recommendation. Do you know why?
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The breakdown of 30,929,273 issued EINs:
Started a new business — 19,425,949
Other — 3,477,406
Created a trust — 3,166,434
Banking purpose — 2,959,909
Hired employees — 721,635
Changed type of organization — 514,896
Created a pension plan — 346,257
Purchased going business — 230,366
Compliance with IRS withholding regulations — 86,421
Example 1 – An identity thief could file a business tax return such as Form 1120, US Corporation Income Tax Return, Form 720, Quarterly Federal Excise Tax Return, or Form 941, Employer’s Quarterly Federal Tax Return) using the EIN of an active or inactive business without the permission or knowledge of the EIN’s owner.
Example 2 – An identity thief could apply for and obtain an EIN using the name and social security number of another individual as the responsible party without that individual’s approval or knowledge, and use it to create fictitious Forms W-2, Wage and Tax Statement, and bogus Forms 1040, U.S. Individual Income Tax Return, which the thief then files to claim a fraudulent refund.
A sole proprietor is someone who owns an unincorporated business by himself or herself. The business owned by a sole proprietor is not treated as a separate entity and, therefore, has no legal distinction from the owner. As such, the owner is liable for all legal and financial matters.
IRS management responded that there are valid reasons why a filing requirement is not assigned during the EIN application process.
For example, tax exempt entities do not have a filing requirement until their application of recognition has been formally accepted. Sole proprietors may have a need to issue Form 1099 which requires them to have an EIN. Additionally, some special trusts need an EIN for filing information returns.
In addition, the IRS has two existing programs that look to identify these types of entities when returns and/or information documents are filed. The Entity Fabrication Program identifies business entities and a program that has several filters that run against certain business forms claiming refunds.