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TREASURY INSPECTOR GENERAL FOR TAX …

TREASURY INSPECTOR GENERAL FOR TAX administration Processes Are Being Established to Detect Business Identity Theft; However, Additional Actions Can Help Improve Detection September 9, 2015 Reference Number: 2015-40-082 This report has cleared the TREASURY INSPECTOR GENERAL for Tax administration disclosure review process and information determined to be restricted from public release has been redacted from this document. Redaction Legend: 2 = Risk Circumvention of Agency Regulation or Statute Phone Number / 202-622-6500 E-mail Address / Website / HIGHLIGHTS PROCESSES ARE BEING ESTABLISHED Identification Numbers (EINs) determined to be TO DETECT BUSINESS IDENTITY associated with a fictitious business.

TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION Processes Are Being Established to Detect ... TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION September 9, 2015 ... The primary purpose of the IRS Advisory Council is to provide an organized public forum for discussion of relevant tax administration issues between IRS officials and ...

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Transcription of TREASURY INSPECTOR GENERAL FOR TAX …

1 TREASURY INSPECTOR GENERAL FOR TAX administration Processes Are Being Established to Detect Business Identity Theft; However, Additional Actions Can Help Improve Detection September 9, 2015 Reference Number: 2015-40-082 This report has cleared the TREASURY INSPECTOR GENERAL for Tax administration disclosure review process and information determined to be restricted from public release has been redacted from this document. Redaction Legend: 2 = Risk Circumvention of Agency Regulation or Statute Phone Number / 202-622-6500 E-mail Address / Website / HIGHLIGHTS PROCESSES ARE BEING ESTABLISHED Identification Numbers (EINs) determined to be TO DETECT BUSINESS IDENTITY associated with a fictitious business.

2 Our THEFT; HOWEVER, ADDITIONAL analysis of business returns filed during ACTIONS CAN HELP IMPROVE Processing Year 2014 identified that 233 tax returns were filed using a known suspicious EIN. DETECTION Of these, 97 claimed refunds totaling over Highlights $ million. In addition, TIGTA determined that processing filters could be developed to identify returns Final Report issued on containing certain characteristics that could September 9, 2015 indicate potential identity theft cases. For example, the IRS has data to proactively identify Highlights of Reference Number: 2015-40-082 business tax returns filed using an EIN the IRS to the Internal Revenue Service Commissioner assigned to a business that **2** for the Wage and Investment Division.

3 **2**. TIGTA also found that State IMPACT ON TAXPAYERS information sharing agreements do not address business identity theft. The agreements only Identity theft not only affects individuals, it can address the detection of individual identity theft. also affect businesses. The IRS defines Finally, TIGTA also identified that actions are business identity theft as creating, using, or needed to better promote awareness of attempting to use businesses identifying business identity theft. information without authority to claim tax benefits. WHAT TIGTA RECOMMENDED WHY TIGTA DID THE AUDIT TIGTA recommended that the Commissioner, Wage and Investment Division, ensure that The IRS recognizes that new identity theft processes and procedures are in place **2** patterns are constantly evolving and, as such, it **2** associated with needs to continually adapt its detection and suspicious EINs; establish a systemic process to prevention processes.

4 The overall objective of identify tax returns filed with an **2** this review was to determine the effectiveness of **2** to file a tax the IRS s efforts to implement a business return return to ensure the legitimacy of the filing and program to detect and prevent identity theft. any refund claimed; establish a filter to identify WHAT TIGTA FOUND **2**; evaluate the potential for expanding information TIGTA found that the IRS recognizes continued sharing agreements to include the sharing of efforts are needed to develop and implement suspicious or potentially fraudulent business tax systemic processes to detect identity theft.

5 To return filings; and continue to develop and offer date, the IRS has taken actions that include additional outreach materials that directly inform defining business identity theft, creating businesses about business identity theft. procedures for IRS employees to follow when The IRS agreed with our recommendations. It they are made aware of a potential business plans to **2** with suspicious identity theft situation, and conducting a EINs, develop a process to systemically identify Business Identity Theft Project to detect tax returns with **2**, work with potential business identity theft relating to stakeholders to assess expanding the State corporate tax returns.

6 Suspicious Filer Exchange to include business However, TIGTA also found that the IRS **2** returns, and update business outreach **2**materials. In addition, the IRS has established **2**filters for certain corporate returns with **2** **2**2**and plans to evaluate expanding these **2**. For example, the filters to other business maintains a list of suspicious Employer DEPARTMENT OF THE TREASURY WASHINGTON, 20220 TREASURY INSPECTOR GENERAL FOR TAX administration September 9, 2015 MEMORANDUM FOR COMMISSIONER, WAGE AND INVESTMENT DIVISION FROM: Michael E. McKenney Deputy INSPECTOR GENERAL for Audit SUBJECT: Final Audit Report Processes Are Being Established to Detect Business Identity Theft; However, Additional Actions Can Help Improve Detection (Audit # 201440004) This report presents the results of our review to determine the effectiveness of the Internal Revenue Service s efforts to implement a business return program to detect and prevent identity theft.

7 This audit is included in our Fiscal Year 2015 Annual Audit Plan and addresses the major management challenges of Taxpayer Protection and Rights and of Fraudulent Claims and Improper Payments. Management s response to the draft report is included in Appendix IV. Copies of this report are also being sent to the Internal Revenue Service managers affected by the report recommendations. If you have questions, please contact me or Russell P. Martin, Assistant INSPECTOR GENERAL for Audit (Returns Processing and Account Services). Processes Are Being Established to Detect Business Identity Theft; However, Additional Actions Can Help Improve Detection Table of Contents Background.

8 Page 1 Results of Review .. Page 5 Data Maintained by the IRS Can Be Used to Proactively Detect Potential Identity Theft on Business Tax Returns .. Page 5 Recommendation 1: .. Page 7 Recommendations 2 and 3: .. Page 8 State Information Sharing Agreements Do Not Address Business Identity Theft .. Page 8 Recommendation 4: .. Page 10 Further Actions Are Needed to Promote Awareness of Business Identity Theft .. Page 10 Recommendation 5: .. Page 11 Appendices Appendix I Detailed Objective, Scope, and Methodology .. Page 12 Appendix II Major Contributors to This Report .. Page 15 Appendix III Report Distribution List.

9 Page 16 Appendix IV Management s Response to the Draft Report .. Page 17 Processes Are Being Established to Detect Business Identity Theft; However, Additional Actions Can Help Improve Detection Abbreviations EIN Employer Identification Number IRS Internal Revenue Service PY Processing Year Processes Are Being Established to Detect Business Identity Theft; However, Additional Actions Can Help Improve Detection Background Identity theft not only affects individuals, it can also affect businesses.

10 The Internal Revenue Service (IRS) defines business identity theft as creating, using, or attempting to use businesses identifying information without authority to obtain tax benefits. Examples include the following: An identity thief files a business tax return ( , Form 1120, Corporation Income Tax Return, or Form 720, Quarterly Federal Excise Tax Return) using the Employer Identification Number (EIN)1 of an active or inactive business without the permission or knowledge of the EIN s owner to obtain a fraudulent refund. An identity thief, using the EIN of an active or inactive business without the permission or knowledge of the EIN s owner, files bogus Forms 941, Employer s QUARTERLY Federal Tax Return, or Forms W-2, Wage and Tax Statement, to support bogus Forms 1040, Individual Income Tax Return, claiming a fraudulent refund.


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