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Federal Tax ID Numbers and How To Protect Your Business From Fraud

Bybusiness.com editorial staff,
business.com writer
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May 26, 2015
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Every business needs a Federal Tax ID Number before opening its doors, but did you know they're vulnerable to fraud? Tips for safety ahead.

Talking Federal Tax Identification Numbers isn’t the most glamorous topic, but if you have dreams of owning your own business, if you do any freelance work or you want to be an entrepreneur, then you will need a Federal Tax ID Number and there may be a lot you don’t know about them. 

Federal Tax ID Numbers are also called Employer Identification Numbers (EIN) and 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 Facts

  • Obtaining an EIN is simple; you can apply here online and you will get your EIN 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 a small business owner, the IRS had a great guide online

Related Article: 11 Ways to Protect Your Business from Cyber Criminals

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, EIN’s are not protected in the same manner as SSNs, and finding an EIN is relatively easy for a business identity thief.  Stolen EIN’s are used for fraudulent tax refunds, also known as Business Identity Theft, and are very common as most business owners are unsuspecting of the danger.

Criminals who attempt this type of fraud will file a fraudulent tax return by reporting false income and withholding to get themselves a false tax refund.  In order 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),” BusinessIDTheft.org. 

The Reality of Stolen EINs & Fraduelnt Tax Refunds

The Treasury Inspector General for Tax Administration (TIGTA) published an audit report entitled Stolen and Falsely Obtained Employer Identification Numbers are Used to Report False Income and Withholding in September 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 EIN’s.    

The problem highlights weaknesses within the IRS, but tax fraud isn’t the only concern.  According to the Small Business Association, business identity thieves will use stolen EIN’s 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 threaten business operations by damaging credit to the point your business will be unable to acquire more credit, as well as stop operations while the owner tries to clean up and recover from the mess.

Related Article: Too Legit to Quit: Is It Time To Take Your Side Gig Full-Time?

Safeguards

Keeping Your EIN Safe

As an EIN holder businesses should be doing their part to protect themselves from tax and other fraud.  Here are some tips from the Small Business Association on keeping your business safe:

  • 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 safe location and shredding any unneeded paperwork.  Also, be sure to protect your company information when working online by using reputable, secure sites when putting your EIN online for bank documents or other applications.
  • Pre-paid business credit card accounts. Consider using a pre-paid business credit card for your employees as opposed to a traditional corporate card.  With a pre-paid card you can control the credit limit, deactivate the card in real time and also limit the merchants where the card can be used. 
  • Monitor your credit. Monitor your company profiles with the three major business credit bureaus.  You can sign up for monitoring services which will give you unlimited access to your profiles.  You can also subscribe to e-mail alerts so you will be notified immediately if there is any new activity on your accounts.
  • Avoid the “Master” user. Having a master user and password will only allow employees or thieves access to all of your company information.  This should be avoided at all costs.

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 also trained an additional 35,000 employees who work with individuals and businesses to recognize identity theft indicators. 

They 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 on identity theft claims through the Law Enforcement Assistance Program.  They also work closely with the Identity theft Clearinghouse (ITC) who refers cases to the IRS Criminal Investigation Field Offices for investigation.   With leads provided by ITC, more than 391,000 tax returns claiming more than $1.3 billion in potentially fraudulent federal income tax refunds were investigated.

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 will help immensely, but most importantly, remember to protect your EIN the same way you protect your SSN.     

business.com editorial staff
business.com editorial staff
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