The Newest Tax Scam: Small Business Identity Theft

About a dozen different kinds of scams are committed during tax season, and even throughout the year, all of which taxpayers should be well aware of. Often, these scams target individual taxpayers, especially vulnerable ones. The latest scam on the rise goes after small businesses, where scammers file fraudulent returns to obtain bogus refunds – so far, they have collected billions from unsuspecting business owners. We outline what to know and how to protect yourself and your business below.

How scammers claim bogus refunds posing as your business

Fraudsters are able to collect bogus refunds but stealing EINS (employer identification numbers), and use them to fill out Form 1120, 1120S, 1041, and Schedules K-1. Partnerships and trust and estates are also affected. In the past, scammers have also used EINs to open new lines of credit, but the filing of business returns has been on the rise in recent years.

How to know if your identity has been stolen

There are few surefire ways to know if your EIN has been compromised:

  • The IRS rejects your extension due to a return already on record as filed under your EIN
  • The IRS rejects your e-filed return due to a return already on record as filed under your EIN
  • You receive a Letter 5263C or 6042C, which notifies taxpayers of potential identity theft
  • You receive a tax transcript or IRS notice that does not connect to anything you have filed with the IRS
  • You fail to receive correspondence from the IRS because the person that stole your identity has changed the address

What to do if your identity has been stolen

Most of the time, the IRS finds the identity theft before you. If you cannot file online because of a fraudulent return, contact your tax professional and file a paper tax return via Form 14039 (Identity Theft Affidavit) with an explanatory statement. Depending on the circumstances, you may need to apply for a new EIN, available through the IRS website. If you have other evidence of identity theft, visit the Identity Protection page of the IRS website, with more information for businesses depending on how the EIN was obtained and used.

What the IRS is doing to prevent these types of scams from happening

The IRS is taking extra steps to verify that business returns are filed legitimately and accurately; one includes requesting additional information, such as the name and SSN of the person that signed the return, the company’s tax payment and filing history, and further information about the deductions the return claims. Sometimes driver’s license numbers are requested.

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