Business, partnership and estate and trust filers increasingly are targeted by national and international criminal syndicates who use stolen data to file fraudulent tax returns for refunds.
In the past year, the Internal Revenue Service has noted a sharp increase in the number of fraudulent Forms 1120, 1120S and 1041 as well as Schedule K-1. 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.
The IRS, state tax agencies and the tax industry, acting as the Security Summit, are expanding their efforts to better protect these filers and to better identity suspected identity theft returns.
Businesses: Recognize Identity Theft 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 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.
Security Summit Actions to Protect Filers
The IRS for several years has taken certain steps to help protect the Form 1120-series filers, and the Security Summit effort is part of that. For the 2017 filing season, tax software products for the first time shared more than 30 data elements with the IRS and state tax agencies. These data points assist the IRS and states in identifying suspicious returns.
For 2018, the data elements will increase, increasing the ability of the IRS and states not only to identify suspicious returns but to reduce “false positives.” This will allow legitimate returns to be processed as usual.
Also for 2018, the IRS will ask those tax professionals preparing business-related returns to step up the “know your customer” procedures. Tax preparation software for business-related returns will ask 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?
These questions also will help identify suspicious returns.
Recent Identity Theft Schemes
All employers should be aware of an ongoing scam to steal employee Forms W-2. Learn how this scam works and how to report to the IRS at Form W-2/SSN Data Theft: Information for Businesses and Payroll Service Providers.
Criminals have long used stolen business EINs to perpetrate tax fraud by creating false Forms W-2 or 1099s or to fraudulently claim certain benefits, such as fuel tax credits. However, in the past couple of years there has been an upswing in the filing of fraudulent Forms 1120 and 1120S.
National and international criminal syndicates are increasingly sophisticated, well-funded and technologically adept as well as tax savvy. These well-organized gangs increasingly are targeting tax professionals to steal client data, which is one of many reasons for the increase in business-related returns fraud.
The fraudsters steal business return data to submit fraudulent corporate returns, such as Forms 1120 and 1120S, or fraudulent information documents, such as W-2s and 1099s, to support fraudulent individual return filings.
If the compromised business-return data included Schedule K-1 links, the criminals also will also use the K-1 shareholder’s information to file fraudulent individual returns.
There has been an increase in fraudulent trust and estate return filings. These identity theft filings involve both existing trust and estates and bogus trusts and estates that were established using stolen individual taxpayer information. As with identity theft filings for individuals the goal of the perpetrators is to obtain a fraudulent refund through the filing of a Form 1041.
The IRS reminds businesses, individuals and tax professional to protect their computers and data to protect against identity theft and refund fraud.