EIN, or Employer Identification Number, is a form of Tax Identification Number (TIN) issued by the IRS in the US specifically for businesses. EIN is an important data point in Know Your Business (KYB) compliance because it shows that the business is valid and is operating legally. By implementing an EIN verification process during KYB, you check if a business has a valid EIN, which is unique to each business and issued by the IRS for identification and tax reporting purposes.
Just as a Social Security Number (SSN) identifies individuals in the US, an EIN works as a key identifier for businesses. That’s why entities can’t legally hire employees or manage finances without an Employer Identification Number, making it a reliable indicator of a company’s legitimacy. This is an important factor for regulated entities, such as banks or fintechs, since they are required to check and verify all their partners before starting a new business relationship.
Verifying another company’s EIN can be useful in any industry; therefore, even if you’re not obligated by law to follow corporate due diligence requirements, you can look through our recommended ways to conduct EIN verification and find out how this sort of background check can benefit your business.
What is an Employer Identification Number (EIN)?
An Employer Identification Number (EIN) is a unique nine-digit identifier (XX-XXXXXXX) used in the US for business identification, employment, and tax reporting. Assigned by the IRS, EINs help track company taxes and ensure a business’s legal status. That’s why EINs are mandatory for nearly all businesses if they want to operate legally in the US. Companies can apply for an EIN online through the IRS. This enables them to handle tax obligations, open bank accounts, or apply for credit.
For example, US-based businesses need to get an EIN if they:
- Have employees.
- Participate in a Keogh plan.
- Deduct taxes on non-resident alien income.
- Have links to other companies, such as estates or trusts.
- Operate as a corporation or partnership.
- File certain tax returns (in sectors like alcohol, employment, excise, firearms, or tobacco).
In the context of KYB compliance and B2B relationships, verifying another company’s EIN helps confirm the business’ legitimacy. EIN verification is conducted during the onboarding process, when a corporate entity, aka a potential business partner or client, needs to provide information. Then, the company’s internal compliance officers are responsible for checking and verifying the information, including the company’s EIN, confirming that the data matches and the company is genuine. They also check for any signs of fraudulent activity, such as deliberately concealing the ownership structure for fraud or money laundering.
What is EIN Verification?
EIN verification is the process of assessing an EIN number and its legitimacy, typically as part of the bigger KYB background check, which is intended to help determine whether the company that’s being verified is operating legally and is compliant. EIN verification, in particular, ensures a business is registered with US tax authorities by confirming that its Employment Identification Number is valid and not fraudulent. This process is crucial, much like verifying a business’s good standing. If a company doesn’t have an EIN or if the verification results don’t match, it can be seen as a red flag, indicating fraudulent activity or untrustworthiness.
However, EIN verification can’t be the only check in the entity’s corporate verification or KYB strategy. For example, certain business structures, such as small new startups or sole proprietors, might start off without an EIN or rely on SSNs, which requires checking different documentation because the EIN check won’t show any results. The same goes for other factors that need to be considered. For instance, a business can change its ownership structure and change its EIN, or it might provide an EIN that doesn’t match the IRS records due to recent name changes, rebrands, or mergers.
Also, as EINs are required for simple operations like opening a bank account or managing investments, and if a potential partner of yours doesn’t have a valid EIN, it automatically poses a big risk in all of these areas. That said, multiple customization options in the EIN verification process are important, but so are flexibility and accuracy in data collection and assessment. By cross-checking multiple databases and documents, you can minimize the inaccuracy rate and ensure that your verified EIN actually belongs to the company that’s providing it.
EIN Verification and its Relation to Regulatory Compliance
While there isn’t an explicit law mandating EIN verification for regulated entities, several US laws mandate KYB checks, which makes this process a part of a broader mandatory framework. For example, the Bank Secrecy Act (BSA) requires verifying businesses and implementing customer due diligence (CDD) measures as part of the company’s mandatory Anti-Money Laundering (AML) compliance program aimed at detecting and preventing illicit activities.
For example, businesses use EIN verification in the following cases:
- During business onboarding (when conducting KYB and background checks on another company).
- When opening a business account (including before other riskier financial operations, such as approving loans).
- Before acquisitions or mergers (or when entering into a business relationship with another company and checking the legitimacy of its EIN).
- For conducting and maintaining ongoing due diligence (as a way to comply with KYB, ensure the business sticks to tax reporting requirements, and your own entity has accurate, up-to-date records for auditing purposes).
This includes verifying that the other business is properly registered with an EIN for KYB verification and AML risk assessment purposes. In terms of determining risks, certain red flags, like mismatches in the EIN verification process, might indicate the need for extra checks or EDD, depending on the case and industry. So, this doesn’t automatically mean that the company isn’t genuine, you might need to ask for different documentation and verify additional data points.
Related: What is the Difference Between CDD and EDD?
The Key Reasons Why EIN Verification is Important for KYB
EIN verification is important because it helps companies:
- Ensure compliance with KYB requirements and guarantee that the company and its beneficial owners are legitimate, making the business a trustworthy partner.
- Assess AML risks and potential links to fraud, assisting in making the decision whether it’s safe to engage with the company without damaging your reputation.
- Determine if the company runs legally in the US with a valid EIN and can conduct certain financial or insurance-related processes avoiding legal liability and other risks linked to fraud.
Various entities are eligible to receive an EIN, including entities like partnerships, limited liability companies (LLCs), sole proprietorships, corporations, government agencies, trusts, estates, military entities, churches, farmers’ cooperatives, or Indian tribal governments and enterprises. So, when you’re onboarding any of these companies as potential partners, clients, or counterparties, you need to check if they are also compliant and are operating legally within US law.
Verifying EINs is part of the KYB framework but is also vital for non-regulated entities that want to stick to their internal risk assessment protocols.
What Makes an EIN Verification Process Effective?
If you’re adding an EIN verification step to your KYB onboarding, you should know the basic functionalities that make the process more efficient and accurate. In this case, an automated KYB solution for business onboarding with a built-in EIN lookup feature is the best option.
However, other factors shouldn’t be forgotten, which we break down in more detail below.
1. The Ability to Verify Multiple Databases
Choosing a reliable source for EIN verification is vital. So, even though EIN data can be listed online, for example, on business credit reports or other sources, like invoices, it should not be the only data used in the overall verification process. The best option is to verify EINs against multiple databases or materials, including cross-referencing against official government records.
If you want to build a compliant EIN verification flow, you need to maintain accurate EIN records and include sources like:
- The IRS (comes in handy for verifying non-profits and charitable organizations)
- The Securities and Exchange Commission (SEC) (the EDGAR system in particular, useful for companies listed on stock exchanges)
- Secretary of State offices
For example, an EIN can be registered in one state but not be shown in another state’s records due to outdated information or a lack of sources used, which makes cross-referencing reputable databases vital. In this case, you can minimize discrepancies and prevent fraud by integrating the IRS and state Secretary of State databases for your EIN verification process.
🟢 Do: Use automation and connect your EIN verification system to at least one official database to ensure accuracy.
🔴 Don’t: Rely on random sources online, especially without additionally collecting and verifying standard KYB onboarding data (such as the company’s name, address, business registration number, etc.).
2. Efficient EIN Format Validation
A well-built EIN verification process should spot forged or invalid EINs immediately. That means it should follow the “XX-XXXXXXX” or 9-digit format, verifying the entity’s structure and checking if it matches the proper format. Having fewer digits or using incorrect dashes might be a typo or a fraud-related red flag. That’s why additional EDD checks or further investigation on your internal compliance team’s side might be required to accurately determine the company’s legitimacy and the validity of its EIN.
Details like suspicious formatting matter because EINs are often associated with identity theft. EINs have certain invalid two-digit prefixes that automatically show they are fake (for example, 00, 07, 08, 09, 17, 18, 19, 28, etc.).Similar to how individuals use stolen SSNs from deceased individuals, criminals use EINs to build fraudulent companies and apply for loans. This is a popular type of financial fraud, even though, at first glance, the business and its name might seem legitimate.
Using an automated EIN verification solution helps save time and screen large amounts of data more efficiently. For example, even for EDD, companies can request extra information from the other entity using a special online form or custom questionnaire instead of relying on back-and-forth emailing or calling.
🟢 Do: Carefully check the EIN’s format to spot any suspicious signs of possible fraud, finding out if extra manual checks are applicable for EDD.
🔴 Don’t: Automatically assume that the EIN is valid once you find the correct EIN structure. Criminals can alter the number to fit the format, so cross-check the EIN to see if it actually exists in any official records (for example, SEC’s website provides 10-K filings with EIN data).
3. Accurate Data Showing EIN History
One of the most important aspects of any compliance process that involves verification is data accuracy. The same principle applies to EINs, which companies need to take into account under certain circumstances, such as changes to an entity’s structure. Even though once the EIN is assigned to a company, it remains linked to that entity (it can’t be removed by the IRS), businesses can apply for a new EIN when they undergo structural changes. This is popular when a sole prop is transitioning to an LLC.
However, frequently changes its business structure and its EIN without a valid reason, it could be a sign of misconduct or attempt to remain undetected due to crimes like money laundering. Tracking EIN history is another valid data point for your company’s risk assessment. Sometimes, one of the challenges is that the company being verified has limited records (for example, if it’s a newly established business), which makes it important to check other documents during KYB, not just its EIN validity.
In general, even if the company stops filing returns, the EIN stays active in case it’s needed for future financial reporting. That means if you use an outdated EIN verification service, results may show you a business’s former EIN, which is no longer valid.
🟢 Do: Use a reliable verification solution provider or access databases with up-to-date EIN data to see the whole history, building a bigger, more accurate background check for the entity’s KYB onboarding.
🔴 Don’t: Rely on outdated EIN records, as structural changes can result in a new EIN. A freshly re-registered entity can appear legitimate but might be using a non-existent EIN without any red flags in its history.
Other Practical Tips for Verifying Employer Identification Numbers
There are three key steps that are required for EIN verification in KYB data-wise, and they are:
- Knowing and verifying the company’s name and the state they were registered in.
- Screening all results, even similar names during your search (to ensure you’re reviewing the correct entity).
- Verifying both EIN data and other KYB-related information, such as business licensing and documentation, including verifying UBOs, directors, and other linked individuals.
If you haven’t implemented any third-party EIN verification solution, you can manually lookup some of the publicly available databases yourself. Start with the Security and Exchange Commission’s Electronic Data Gathering, Analysis, and Retrieval system, better known as EDGAR. All publicly traded entities are registered there, making their EIN details accessible.
For charities and non-profits (they aren’t required to register with the SEC), use the IRS’s Tax Exempt Organization database to find their EINs. Another way to verify EINs is by purchasing business credit reports from major credit agencies. Since not all include EINs or tax details, you should check availability beforehand.
For more options on seamless, automated EIN verification and KYB compliance, contact us, and we’ll give you a free tour of our dashboard.
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