Businesses need a federal tax ID number before they can open their doors, but did you know they're vulnerable to fraud?
Every business needs a federal tax ID number before opening its doors. While easy to obtain, they are also easy to steal. Federal tax ID numbers, also called employer identification numbers (EIN), are issued by the Internal Revenue Service (IRS) for tax purposes. They are also used for any business banking needs, such as opening an account or taking out a loan, as well as any state or federal licensing needed for your business. The key is not only having a clear understanding of what these numbers are used for but also how to ensure they stay secure.
What is a federal tax ID number?
The IRS is a massive part of the U.S. government, handling more than 250 million tax returns and other forms each year and collecting more than $3.5 trillion in taxes. One way it manages to keep track of the taxes is through a nine-digit identifier called a federal tax ID number (TIN).
These numbers are used to identify every individual and business entity that pays taxes within the U.S. They are issued for free either by the Social Security Administration at birth or naturalization in the form of a Social Security number, or as an employer identification number (EIN) issued by the IRS when a business entity is formed.
Your EIN is an incredibly important piece of information. Without it, you can't open a business bank account, apply for a business license or loan, and you won't be able to file taxes. Sole proprietors have the option of either using their Social Security number or an EIN, since there's no legal distinction between the individual and the business.
Obtaining an EIN is simple; you can apply here online, and you receive your number immediately. Once you've obtained your EIN, you can start paying taxes on your business. If you need help determining what your tax obligations are as a small business owner, the IRS has an online guide.
Protecting Your EIN
According to BusinessIDTheft.org, an EIN is to your business what a Social Security number (SSN) is to you, and it must be protected in the same manner you use to protect your personal information.
Unfortunately, finding an EIN is relatively easy for a business identity thief. Stolen EINs can be used to fraudulently obtain a tax refund, and many business owners are unsuspecting of the danger.
Criminals who attempt this type of fraud, business identity theft, file a fraudulent tax return by reporting false income and withholding to get a false tax refund. For this false tax return to work, "the fraudulent wages and withholding must appear to come from a real employer; and therefore, requires the use of an employer's business name, address, and Employer Identification Number (EIN)," states BusinessIDTheft.org.
Where to find your federal tax ID number
Since your EIN is akin to your Social Security number, you must know where to find it if you haven't committed it to memory. There are three surefire ways to locate your business's unique nine-digit identification number:
Refer to the EIN confirmation letter. When issuing an EIN, the IRS sends a confirmation letter. That letter contains your EIN, as well as other important business information. If you can't find the letter, consider how you applied:
- Online applications for an EIN get a confirmation letter instantly. Check to see if you saved the confirmation as a separate file on your computer or if it is in your email inbox. If you can't find anything on your computer, don't worry. You would have also received a physical letter in the mail.
- Fax applications would have received a return fax containing the confirmation letter.
- Mail-in applications would have resulted in a confirmation letter being sent to you through the postal service.
Refer to old business documents. If this isn't your first year operating as a taxpaying small business, then you likely have access to tax returns from prior years. If that's the case, you can easily find your EIN on the first page of your tax return. Most forms have the EIN listed in field B. Other documents your EIN will likely be listed on include business loan applications, bank statements, business licenses, credit reports and payroll documentation.
Contact the IRS. If all else fails, you can always contact the IRS through the agency's Business and Specialty Tax Line at 800-829-4933. The hours of operation are between 7 a.m. and 7 p.m. local time, Monday through Friday. When you call, be sure to have proof that you're authorized to receive sensitive business information. You can do that by answering any questions the IRS representative asks you.
How many EINs are stolen and fraudulent tax returns filed?
The Treasury Inspector General for Tax Administration (TIGTA) published an audit report, "Stolen and Falsely Obtained Employer Identification Numbers Are Used to Report False Income and Withholding" in 2013, and the key findings were that the IRS could issue more than $2.3 billion in potentially fraudulent tax refunds every year. In the 2011 tax year, TIGTA discovered 767,071 e-filed individual tax returns with fraudulent refunds from falsely reported wages and withholdings using 277,624 stolen EINs.
The problem highlights weaknesses within the IRS, but tax fraud isn't the only concern. According to the U.S. Small Business Administration (SBA), business identity thieves use stolen EINs to open credit accounts using your business name, and once they have credit, they will enjoy a spending spree buying electronics, gift cards and any other items they can then sell for cash. The damage can prevent your company from acquiring more credit, and it can threaten business operations.
How to keep your EIN Safe
As an EIN holder, businesses should protect themselves from tax and other forms of fraud. Here are some tips from the SBA to protect your business:
- Develop a plan. Have a step-by-step plan in place for how to protect your business's identity and what to do if it becomes compromised.
- Protect your documents. Just as you protect your SSN, business owners should protect company documents, keeping them in a secure location and shredding any unneeded paperwork. Protect your company information when working online by using reputable, secure sites when putting your EIN online for bank documents or other applications.
- Use a prepaid business credit card. Consider using a prepaid business credit card for your employees, as opposed to a traditional corporate card. With a prepaid card, you can control the credit limit, deactivate the card in real time and limit where the card can be used.
- Monitor your credit. Monitor your company with the three major business credit bureaus. You can sign up for monitoring services that give you unlimited access to your profile. You can also subscribe to e-mail alerts so you are notified if there is new activity on your accounts.
- Avoid the "master" user. Having a master user and password can allow employees or thieves access to all of your company information. This should be avoided at all costs.
What to do if your EIN is stolen
The IRS warns that "all taxpayers must be alert and on guard at all times" when it comes to protecting an EIN. If the information falls into the wrong hands, the agency has five ways to report suspected business identity theft or data loss.
- You can file a formal affidavit, Form 14039-B, Business Identity Theft Affidavit.
- You can also report suspected identity theft through the IRS's business helpline at 800-829-4933.
- If you believe you've suffered a data loss that could result in a W-2 scam, you must inform the IRS as quickly as possible. You can email firstname.lastname@example.org to notify the IRS of the breach with a subject line of "W2 Data Loss." You will need to provide contact information in your message. You should also report the data loss to state tax agencies and other law enforcement officials, including the FBI's Internet Crime Complaint Center.
- You should also alert potentially affected businesses after the data security breach, since your dealings with them could contain sensitive information. Individuals whose personal information could have been compromised should be made aware of the situation as well, so they can work to avoid the misuse of their sensitive data.
How the IRS is responding to business identity theft
According to IRS.gov, the IRS has 3,000 employees dedicated to identifying tax fraud through identity theft. They have trained an additional 35,000 employees who work with individuals and businesses to recognize identity theft indicators.
It will continue to increase the number and the efficiency of identity theft filters used to detect identity fraud and initiate criminal investigations against suspected identity thieves. The average prison term for an identity thief is three years.
The IRS works with local law enforcement in 35 states to identity theft claims through the Law Enforcement Assistance Program. They also work closely with the Identity Theft Clearinghouse (ITC), which refers cases to IRS criminal investigation field offices.
With a few small tips, you can keep yourself and your company safe from business identity theft. Something as simple as having a plan and keeping a close eye on your credit profiles can help immensely, but most importantly, protect your EIN the same way you protect your SSN.