While tax-related identity theft against individual taxpayers is on the downswing, fraudsters have increased efforts on another front to obtain illicit refunds: Stealing identities of legitimate American companies to file bogus business tax returns.
In the first five months of this year, the Internal Revenue Service flagged some 10,000 business returns for suspected tax-related identity theft – a 250 percent increase from the 4,000 cases in all of 2016 and 2,757 percent uptick from 350 suspected cases in 2015. The IRS estimates potential losses from business-related ID theft against corporations, partnerships, limited liability companies and other business entities at $137 million so far in 2017, compared with $268 million in 2016 and $122 million in 2015.
Meanwhile, during the same January-through-May period of 2017, the IRS reports that 107,000 individual taxpayers reported being victims of tax-related ID theft. That’s a 47 percent drop compared to the same period in 2016, when 204,000 consumers filed victim reports with the agency (with 376,500 for all of 2016). In the first five months of 2015, the IRS received almost 297,000 reports from individuals, and 698,700 for that entire calendar year.
“Cybercriminals are showing increasing savvy and tax expertise as they use stolen data, sometimes from tax practitioners, to file these business, partnership and trust returns for refunds.” notes the IRS. “Or they post the stolen data for resale on the Dark Net so that other criminals can file fraudulent tax returns.”
Historically, business-related identity theft aimed for refunds for benefits such as fuel tax credits. But scammers are now filing fraudulent corporate returns (Forms 1120 and 1120S) and estate and trust returns (Form 1041) to obtain fraudulent refunds. The IRS says that crooks are also using fraudulent Schedule K-1 filings made by partnerships to file bogus individual returns.
Meanwhile, tax preparers themselves are an increasingly popular target among scammers. During the first five months of 2017, there were 177 reported data breaches at tax preparers’ offices – and the IRS “continues to receive reports of three to five data breaches each week.”
Just weeks ago, the IRS warned about a new scheme – phishing emails being sent to accountants and other tax professionals “seeking extensive amounts of sensitive preparer data” that could enable scammers to steal client data and file fraudulent tax returns. These bogus emails, purportedly from a major tax software education provider in the U.S. (which the IRS did not identify), claims a database problem in requesting tax preparers’ log-in credentials, answers to “secret” security questions, birth dates, Social Security numbers, even the maiden names of their mothers.
IRS Commissioner John Koskinen credits the decline in tax refund fraud against individuals to an information-sharing partnership launched in 2015 by the IRS, state tax officials, and tax industry professionals and organizations, including tax-preparation software companies. In an effort to drive down refund fraud against corporations and partnerships, the IRS and other members of the partnership have urged tax preparers to increase security safeguards – and be suspicious of any potential business clients claiming they do not currently have an Employer Identification Number.
For the 2017 filing season, the tax software industry began sharing “data elements” from tax returns with the IRS and states to help spot suspected identity theft on business returns. Those efforts will be expanded next year; also in 2018, the IRS will be asking tax professionals to gather more information on their business, trust and estate clients – including the name and Social Security number of the company contact authorized to sign the business return and details about the firm’s tax payment history.
Worried that your firm has already been targeted – or victimized? Warning signs of business-related identity theft for filers of business, partnerships, estate and/or trust tax paperwork (and their tax preparers) include:
- An e-filed return, or filing extension request, being rejected because a return with the Employer Identification Number or Social Security Number has already been filed.
- Receiving an unexpected receipt of a tax transcript or IRS notice that doesn’t correspond with anything the business submitted.
- Failure to receive expected and routine correspondence from the IRS, which could indicate that the identity thief has changed the contact address for the business.
For information about other scams, sign up for the Fraud Watch Network . You’ll receive free email alerts with tips and resources to help you spot and avoid identity theft and fraud, and keep tabs of scams and law enforcement alerts in your area at our Scam-Tracking Map .
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