Nobody likes paying taxes. But given the choice between paying taxes and getting cheated out of your money by fraudsters, well, most people would pick the taxman over the criminal. Yet that doesn’t stop thousands of people from forking over millions of dollars in hard-earned wages to con artists.
And your tax return is one area where spotting scams is made that much harder by the complexity of the tax code. Many Americans aren’t confident in their understanding of how the IRS works or how their taxes are collected, so there’s ample opportunity to take advantage of those knowledge gaps to create a scheme that works.
Fortunately, the IRS produces a list of the “Dirty Dozen” tax schemes every year, detailing the 12 tax scams that taxpayers should keep an eye out for when navigating their taxes. And if you can spot the signs of a scam early, it’s that much easier to avoid the pitfalls that have ended up costing so many other tax scam victims before.
Last updated: Nov. 27, 2019
If you’ve gotten tricked into revealing personal information by an email that claims to be from an official source but is, in fact, an attempt at fraud, well you’re not alone. And hey, at least your phishing problem probably isn’t as public as, say, Hillary Clinton campaign manager John Podesta’s was in 2016.
In 2018, the IRS noted that a new twist on the scam started to spring up. Thieves will use stolen personal information to file fraudulent tax returns in your name and then will pose as the IRS or a collection agency to get the funds after they have been direct-deposited into your bank accounts. But there are ways to protect yourself from this scam.
How To Protect Yourself From Phishing
This one is pretty simple: Don’t send personal information to anyone who is emailing you out of the blue asking for it. The IRS will “never initiate contact with you via email about a bill or tax refund.” Not only is an email from the IRS that asks you to send along your annual income or Social Security number definitely a fake, but if you don’t recognize the person who sent the email in the first place, report it immediately. Also, be careful about entering your personal information into sites you’re directed to from email. Many phishing scams will make use of fake web portals to fool users into entering information on the site that the user believes is an IRS site.
The old school version of phishing involved the telephone, and it still works well enough to make the “Dirty Dozen.” Fraudsters might call you up and impersonate an IRS agent or tax professional in an effort to get you to reveal personal information or send money, frequently claiming that you have an unpaid tax bill and then threatening arrest, deportation or other legal action. But, the IRS is careful to point out that there are numerous variations as the criminals will often change tactics to find success.
How To Protect Yourself From Phone Scams
Any time you receive an unsolicited phone call, you should immediately be suspicious — regardless of what they’re asking for. The IRS is careful to inform taxpayers that they will never call to demand immediate payment of an unpaid tax bill using a specific method of payment, and they will generally always send a bill via mail prior to attempting to contact you by phone. Legitimate IRS agents will also never threaten to immediately call the police, demand payment without giving the taxpayer a chance to question or appeal the amount, ask for a debit or credit card number over the phone or call about an unexpected refund. If someone on the phone does any of the above, it should be a clear sign they’re not who they say they are.
Although tax-related identity theft is down in recent years — in 2018, 48,710 cases were reported compared to 75,797 cases in 2017 — plenty of people are still falling victim to the dangerous scam. If a criminal gets hold of your Social Security number or Individual Taxpayer Identification Number (ITIN), they can pose as you and file a tax return to claim a refund fraudulently.
How To Protect Yourself From Identity Theft
The first step is understanding just how valuable your personal information can be to a scammer, and then you need to work hard to protect it. Learn to spot and report phishing emails, make sure your security software and firewall are updated routinely, use strong passwords and encrypt sensitive files like previous years’ tax returns that could be used to steal the information necessary to impersonate you with the IRS. And for that matter, don’t carry around your Social Security card if you don’t have a specific need for it, someone could catch a glimpse of it or worse, you could lose it.
Be Smart With Your Money: The Ultimate Financial Planning Guide
Return Preparer Fraud
A significant portion of the American public isn’t filing their own taxes, instead, they’re relying on a tax preparer to handle the arduous process. And although most preparers are doing honest work for honest pay, there are some who will abuse your trust. The person preparing your taxes should be available to break down any and every question you have about your finances. If they’re not honest, they might attempt anything from trying to claim illegal deductions or credits as a way to increase their fee to simply using their position to steal your tax refund or personal information. Also, make sure to keep a close eye on your tax preparer’s work trail if they play multiple roles in your financial life.
How To Avoid Return Preparer Fraud
You shouldn’t be shy about pressing your preparer for details that can help you confirm that they’re operating above board. Ask your preparer if they have an IRS Preparer Tax Identification Number (PTIN). Paid preparers have to register with the IRS, so they’ll need a PTIN to include on returns. For that matter, look out for preparers who are hard to get hold of or have a dearth of easily accessible public information about them and their business. And use resources like the Better Business Bureau or the State Board of Accountancy to do your due diligence before handing over any documents.
If your preparer does multiple things for you financially, such as bookkeeper and/or CPA, make sure to ask for a final itemized list of your preparations, financial statements and books. This will help you find any suspicious charges, expenses or upcharges where you didn’t expect.
Using people’s generosity to take advantage of them is pretty low, but that doesn’t stop some criminals from doing it anyway. Luring you in with a cause you hold dear and the promise of a tax deduction, fake charities will convince you to hand over cash and then try to claim it on your taxes come April. Or, if you’re really unlucky, they might even use their front as a means to steal personal information that they can then use to commit further fraud or steal your identity.
How To Avoid Fake Charities
The IRS offers a search feature called Exempt Organizations Select Check to determine if a charity is legitimate or not, so you can run any group through that to confirm it’s legit. You should also ask for their Employer Identification Number (EIN), which any real organization should provide without complaint. Also watch out for a group that is using a name only slightly changed from a well-known organization while also mimicking the look and feel of the group, and never send cash via mail or give out your credit card information to someone contacting you to solicit a donation.
Inflated Refund Claims
Plenty of shady preparers or even just criminals posing as preparers will suck you in with claims that they can provide huge refunds that will dwarf whatever your CPA is telling you is possible. Once they’ve convinced you to sign up with them, they will dupe you into making fake claims for benefits or credits, potentially even filing a false return or stealing your refund without telling you.
How To Avoid Inflated Refund Claims
These scams often target people without a filing requirement — seniors or people with low incomes — so if you’re in that group, be especially cautious if someone promises you a chance to file and score big refunds. However, even if you’re not, remember that if it sounds too good to be true, it probably is. If your preparer is promising a refund that’s well beyond what you normally get, the odds are pretty good they’re either doing so to hook you in or they intend to break the law to get there. Research your preparer carefully and stick to someone with a track record you can trust.
Excessive Claims for Business Credits
Scammers posing as tax preparers will often convince you to make improper claims of business credits for which you don’t actually qualify. These can look great, but they will usually end up with you paying a steep fine for improperly claiming the credit while your preparer is long gone with the hefty fee they charged.
How To Avoid the Excessive Claims for Business Credits
The IRS highlights two credits in particular — the research credit and fuel tax credit — as being especially common in these scams. Both are legitimate tax credits you can take, but they have a number of specific criteria a taxpayer must meet before being able to legitimately claim them. If your preparer is pushing you to take these credits, that could be a major red flag. Research what’s required for each — not to mention your preparer’s credentials — and if you don’t qualify, report your preparer to the IRS.
Falsely Padding Deductions on Returns
It’s certainly not uncommon to reach the end of your return, not like what you see and go back to try and find some more deductions. However, padding your deductions with ones you can’t take legally is not the right solution and can land you in some hot water, including penalties that can include 20% of the disallowed amount, a $5,000 fine if the IRS finds you’ve filed a “frivolous” return and/or 75% of the amount owed if you’re determined to have underpaid.
How To Avoid Falsely Padding Deductions
This one is a little easier to avoid than most in that it’s well within your control if you’re preparing your own return. Just be careful to read over all the requirements for any deduction before you take it. That said, an overeager tax preparer can easily land you in hot water by trying to grab you a bigger refund, so consider running your return through one of the many options for tax preparation software. There are plenty of free options, and if there’s a big discrepancy between what the program says you can deduct and what your preparer does, be sure to ask for an explanation before you file.
Falsifying Income To Claim Credits
Although it seems counterintuitive, pretending you made more money than you actually did can make for a bigger refund in certain situations. Namely, large refundable credits like the earned income tax credit can sometimes kick in when you earn more, providing the incentive to make up income to trigger the credit.
How To Avoid Falsifying Income
It’s not hard to avoid falsifying your own income, but it is worth noting that con artists will sometimes try to catch up otherwise law-abiding tax filers in these schemes. The most common method involves a fake 1099-MISC that appears to be issued by a large financial company like a bank or mortgage company that the taxpayer already has a relationship with, and can often involve a fake Form 56 — Notice Concerning Fiduciary Relationship. If someone pitches you a way to make fast money with these two forms, be extra wary of what they have to say.
Frivolous Tax Arguments
No, this isn’t describing the 15 minutes you and your significant other spent fighting about whether to use a blue or black pen on your 1040. This would be trying to avoid paying your rightful tax bill by making flawed legal arguments in court. Although you are entitled to a legal appeal of any tax liability, you might encounter people promoting a strategy of making “unreasonable and outlandish claims” that will undoubtedly be thrown out in court, potentially resulting in significant tax penalties.
How To Avoid Frivolous Tax Arguments
There is a reason taxes are listed alongside death as being unavoidable. Anyone who insists that they have a foolproof way to help you beg off from your tax bill in court is probably not acting in your best interest. That’s even truer if they’re charging some sort of fee to help you make that argument. There are almost no circumstances where you’ll be able to get out of your tax bill, and on the off chance that one applies to you, get a second opinion from a CPA or attorney before you file anything.
Abusive Tax Shelters
There are plenty of ways to legally shelter income that maybe shouldn’t be legal, but there are also plenty of illegal ways to use legal tax shelters— in particular, using section 831(b) of the tax code to create an illegal shelter that poses as an insurance company. Although it’s a little complex, micro-captive insurance tax shelters provide legitimate insurance companies a way to manage risks by not counting premiums as income, but that structure can be abused by essentially faking insurance policies with inflated premiums to take advantage of the tax loophole.
How To Avoid Abusive Tax Shelters
If your accountant is describing a process for avoiding taxes that involves either creating a small insurance company solely to avoid your amount due or if your insurer isn’t one that you can find much information on, proceed with extreme caution. This could be especially important if you own your own business, so be sure you’re checking up on what your preparer is doing on your behalf.
Offshore Tax Avoidance
Using unreported accounts in other countries to hide money from the IRS is illegal, even if it’s pretty common among the richest Americans. In fact, the Offshore Voluntary Disclosure Program that opened in 2009 and ended this last September wound up collecting over $11 billion from over 50,000 disclosures. Still, breaking the law isn’t excused just because a lot of other people are doing it.
How To Avoid Offshore Tax Avoidance
The odds are pretty good that, if you’re doing this, you’re doing so willingly. In which case, stop. However, that doesn’t mean that your accountant — or accounting department — might be playing a little fast and loose with the rules, so be sure you have at least a basic understanding of what they’re doing when it comes to money held overseas. There are legitimate ways for holding money overseas, but if those accounts aren’t getting reported to the IRS, you’re probably on the wrong side of the law.
More From GOBankingRates
- 401(k) vs. Roth 401(k): What’s the Difference?
- Best Credit Unions Anyone Can Join
- 5 Best Investment Apps: Commission-Free Trading and More
- 16 Effective Ways To Trick Yourself Into Saving Money
Amen Oyiboke-Osifo contributed to the reporting for this article.
About the Author
Joel Anderson is a business and finance writer with over a decade of experience writing about the wide world of finance. Based in Los Angeles, he specializes in writing about the financial markets, stocks, macroeconomic concepts and focuses on helping make complex financial concepts digestible for the retail investor.