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Gogi Overhoff
Wray Rives
CPAs hold key to preventing electronic tax fraud

Electronic filing identification numbers can open door to ID theft.

February 11, 2013
by Wray Rives, CPA, CGMA

The intentional misuse of electronic filing identification numbers (EFINs) is a growing problem. In 2011, the IRS started requiring most individuals and firms who are paid to prepare tax returns to e-file their clients’ 1040, 1040A, 1040EZ, and 1041 tax returns. Tax preparers are required to have an EFIN to electronically file tax returns. To obtain an EFIN, you must sign up for an e-Services account and complete an application to become an authorized IRS e-file provider or electronic return originator (ERO). The CPA firm owns the EFIN, but principals of the firm can use either their Social Security number or employer identification number (EIN) to apply for an EFIN.

As of October 2012, the IRS had stopped accepting Form 8633, Application to Participate in the IRS e-File Program, on paper. All applications for an EFIN must now be submitted online. It typically takes four to six weeks to obtain a number. The application includes a criminal background check, credit history check, tax compliance check to ensure all returns have been filed and to identify any prior assessed penalties, and a check for any prior noncompliance with IRS e-file requirements.

If the IRS believes an EFIN has been compromised or used inappropriately, the IRS will disable the number and notify all form transmitters to not accept tax returns filed electronically using the suspect number. Because EFIN numbers are not transferrable, there is sometimes inadvertent misuse of a number, such as when an individual moves to another firm. If you change firms, you are not allowed to use the EFIN held by the previous firm. If a principal in a firm who is listed on an EFIN application dies and his or her death changes the structure of the business, the firm must obtain a new number. If you have not used your EFIN in two years, you must apply for a new number.

We all know the uproar over fraudulent returns, identity theft, and preparer tax identification numbers (PTINs), but apparently the real problem is EFINs. Criminals have been making use of EFINs to file fraudulent returns. In 2008 a New Jersey man purchased the tax preparation business of a recently deceased return preparer. Because he was unable to obtain an EFIN in his own name due to a prior criminal conviction, he allegedly used the EFIN of the deceased professional to file 657 fraudulent returns for 2009 and 2010.

In 2011, Forbes reported that a Florida man was accused of using a single EFIN to electronically file more than 5,000 tax returns for deceased taxpayers. The fraudster, perhaps mining databases posted online by websites such as Ancestry.com and Genealogybank.com, obtained names and Social Security numbers for people who died in 2009 and 2010. By filing false claims for those individuals, the man claimed slightly more than $12 million in fraudulent refunds using the one EFIN. When the IRS tracked down the person who was assigned the number, he admitted that another person paid him $1,000 to obtain the EFIN.

The good news is the IRS allows you to check the activity on your EFIN online. Go to the IRS website and log in to your e-Services account. (This requires the same login information you used to originally obtain your EFIN.) Select that you are logging in individually, and you should be taken to the e-Services menu. Select “application” to see your current EFIN application. You can also apply for a new EFIN from this e-file application page.

Click on your firm’s EFIN application, and a menu should appear with links to all the information from your EFIN application and EFIN account. Select the EFIN status link, which is near the middle of the list. This link takes you to a screen showing a count of all the returns by form number filed under your EFIN last year. You should have a pretty good idea how many returns your firm filed last year, so if the numbers don’t look accurate or you have reason to believe your EFIN may have been compromised, contact the IRS Tax Professional Help Desk at 866-255-0654.

The vast majority of fraudulent tax returns filed by identity thieves are filed electronically. If electronic filing is the doorway to filing fraudulent tax returns, an EFIN is the key that unlocks that door. CPAs need to ensure they control who uses their firm’s EFIN key.

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Wray Rives, CPA, CGMA, helps startup and small business owners compete and succeed in their local or global market as founder and manager of NeedaCFO.com and through his public accounting firm Rives CPA.