TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

Office of Audit

ACTIONS ARE NEEDED TO REDUCE THE RISK OF FRAUDULENT USE OF EMPLOYER IDENTIFICATION NUMBERS AND TO IMPROVE THE EFFECTIVENESS OF THE APPLICATION PROCESS

Final Report issued on February 7, 2018

 

Highlights

Highlights of Reference Number:  2018-40-013 to the Internal Revenue Service Commissioner for the Wage and Investment Division.

IMPACT ON TAXPAYERS

The IRS processed more than five million Employer Identification Number (EIN) applications in Fiscal Year 2016.  Business identity theft is a growing threat to tax administration.  As such, it is essential that the IRS develops processes to both authenticate individuals applying for an EIN and to ensure that there is a valid business reason to obtain an EIN.

WHY TIGTA DID THE AUDIT

This audit was initiated because many EINs are not used to file business tax returns and may be at risk for fraud or business identity theft.  This audit evaluated the processing of EIN applications to ensure the accuracy and reliability of the data captured by the IRS.

WHAT TIGTA FOUND

Recognizing the risk associated with the misuse of EINs to commit filing fraud, the IRS developed filters and other processes in response to prior audit recommendations.  As a result, the IRS reported that between January and June1,2017, it identified approximately 10,000 business returns with characteristics of identity theft with associated refunds totaling $137 million.  However, actions are needed to reduce the risk to tax administration associated with EINs issued for nontax-related purposes. 

In addition, programming errors resulted in the incorrect assignment of more than 227,000 EINs to sole proprietors who either already had an EIN or were deceased according to IRS records.  TIGTA also found that additional application screening filters and processes to monitor the online application system could improve the accuracy of processed applications and reduce user burden.  This includes strengthening processes to help identify applicants that may be abusing the system to obtain additional EINs.

We also identified that the processing of paper EIN applications results in a high number of errors and an inefficient use of resources.  Based on a statistical sample of 206 EIN applications, 66 (32 percent) applications contained one or more processing errors.  Based on the results of this sample, TIGTA projects that 20,867 applications were potentially inaccurately processed by the IRS.

Finally, the IRS has data which can be used to proactively identify EINs assigned to individuals who may pose a risk to tax administration.  These data include a list of individuals or businesses used as responsible parties for businesses previously determined to be fictitious by the IRS.

WHAT TIGTA RECOMMENDED

TIGTA made 18 recommendations to improve EIN application processing.  The IRS agreed with 15 recommendations and has taken or plans to take corrective actions.  The IRS did not agree with three recommendations.

READ THE FULL REPORT

To view the report, including the scope, methodology, and full IRS response, go to:

https://www.treasury.gov/tigta/auditreports/2018reports/201840013fr.pdf.