It is tax time and that means finding the best way to file your taxes and to get a refund of any amount you've overpaid. Unfortunately, tax time also means plenty of scammers are thinking of new and clever ways to try and get their hands on your money or on your personal information (which they can use to get money).
Those who specialize in IRS tax scams are clever and can be very convincing. Your first line of defense is to always know what to be looking for in terms of common tax fraud in order to avoid being another victim.
8 Most Common Tax Scams
Protecting yourself from IRS tax scams can be tricky if you're not aware of what the threats are. A good tax scam seems legitimate, and that is what makes them dangerous. Always be on the lookout for the eight most common tax scams, including:
- IRS Phone Scams
- Fake IRS Emails
- Fraudulent Tax Refunds
- Fake Charities
- Fraudulent Tax Preparers
- Set Up Offshore Accounts
- Empty Promises
- Frivolous Returns
To know what exactly you need to watch out for, let's look at them in more detail.
IRS Phone Scams
If someone calls you claiming to be from the IRS, it is almost certainly one of many IRS phone scams. The IRS will never call you to demand money for back taxes or to confirm your personal information, so be immediately alert. Never give personal information over the phone, and don't head to the bank to follow the demands for money.
If you do wind up on the end of an IRS phone scam, don't become flustered by aggressive tactics by the fake "agent". They are good at sounding threatening and demanding information or payments. Remain calm and ask for contact information. Tell the scammer you'll call them back with information. Either the scammer will give you fake information or he will work to avoid leaving any information at all. Regardless, don't call him back. Simply report the call to the local police or the IRS.
Fake IRS Emails
Another very common fake IRS scam is phishing, or sending fake IRS emails, in a ploy to gather personal information. Fake emails will look authentic and will ask you to click on a link or to log in to a fake IRS website. The purpose of these emails is to simply gather your personal information to be used for other fraudulent purposes.
Just like with IRS phone scams, you should be immediately wary if the IRS appears to send you an email. The IRS does not contact citizens through email. All official IRS communication will come through standard mail. If you do find a fake IRS email in your inbox, forward it on to the IRS. The IRS investigates these scams and has a dedicated email address for this very purpose: email@example.com.
Fraudulent Tax Refunds
Another very popular tax scam starts well before the tax season. To file a fraudulent tax return, the scammer must gather all pertinent personal information including a social security number. He then uses the information he gathered to file a fake tax return on your behalf. Naturally, he's not going to send you the refund he's claiming – that goes into the scammer's pocket.
The best way to prevent a fake tax return is to guard your personal information closely at all times. If nobody is able to steal your identity, they can't file a tax return. Another good step is to file your own tax return as early as possible. That way, even if your information was stolen somehow, you will get your refund correctly and the IRS will be alerted when someone files a second return using your information.
Charitable donations are tax deductible if you're itemizing your deductions. This creates possibilities for scammers to take advantage of others who are looking to reduce their tax burden and increase their refund by making donations. Fake charities can take on many shapes and forms.
Some may appear conveniently around tax time or be affiliated with fraudulent tax preparers. The claim is that by donating to the fake charity you will help others and reduce your own tax liability. Instead, you’re giving someone free money and you won't be able to deduct the donation as it's not a real charitable organization. Other fake charities involve you in a scam by promising to give you back your donation as soon as the tax return is filed, for example. It goes without saying that claiming a donation you didn't actually make is tax fraud and highly illegal.
At the advice of his tax preparers, a famous country singer Willie Nelson moved some of his money into tax shelters and charities to help reduce his tax bill. The IRS grew suspicious of the moves and investigated. In one of the most famous IRS cases in the United States, Willie Nelson was hit with a tax bill in the millions when his charities and shelters were found to be invalid.
Willie didn't have the funds to make the payments, so the bill continued to grow until the IRS finally grew so frustrated they raided and seized all of Willie Nelson's properties including a recording studio, a ranch, and his home. Even that wasn't enough to pay the bill, so eventually Willie made a deal with the IRS. He recorded an album and all proceeds from that album went directly to the IRS to whittle away his debt. Willie did file suit against the accounting firm that advised the tax shelters in the first place, but the two parties settled out of court.
Fraudulent Tax Preparers
Some scam artists show up in a suit, open a storefront and offer to prepare your tax return for you. These tax preparers appear by all accounts to be absolutely legitimate, and many go to great lengths to convince customers of their years of experience and authenticity.
As a fraudulent tax preparer, however, the person is not legitimate. The scam artist can use your tax return in many ways for his own benefit. He can inflate your refund and skim off the top. He can charge outrageous fees for filing on your behalf. He can file your return correctly this year and gather all of your information to make a fake return for his benefit next year.
If you are going to have someone else prepare your taxes, be sure to look carefully through tax service reviews. Tax service reviews are available on many different websites that offer feedback on companies and services. These reviews will give you a very good idea about the legitimacy of the business and the reliability of the preparer. If a company doesn't have any tax service reviews on any website, that may be a sign that it's a pop-up company that will disappear as soon as the scammer has what he wants.
Set Up Offshore Accounts
Some tax scams sound good, but require your participation in illegal activities. For example, you may meet an unscrupulous tax "professional" who offers to help you move some of your money into an offshore account.
This sounds legitimate as many people use offshore accounts for valid reasons, but by moving your funds into an offshore account with the intent of hiding that income from the IRS, you're committing tax fraud. Additionally, if you're working with a shady professional, it's highly likely that neither you nor the IRS will see your extra income ever again. And you can still wind up with a legal case with your money stolen and gone.
The tax preparer who encourages you to sign a blank tax form is nobody you want to work with. These preparers encourage you to simply sign the form because he or she is going to work out the numbers for you so that you can get the highest possible refund. If you do this, you are almost certainly subjecting yourself to tax filing scams.
Signing a blank tax form is potentially worse than simply signing a blank check for a stranger. Not only are you at risk of losing your personal information and any refund you might be owed, you are also at risk of legal action by the IRS for signing your name on a refund that is almost certainly going to contain false and fraudulent information.
The IRS sees a ridiculous number of what they call "frivolous returns" every year. A frivolous return is a tax return that is filed with the intent of simply wasting time. These frivolous claims have already been thrown out in court, so filing a tax refund making a frivolous claim is simply opening yourself up to additional action by the IRS including fines of at least $5,000. The top "frivolous claims" include:
- Refusing to pay taxes on moral or religious grounds
- "Opting out" of paying taxes
- Invoking the First Amendment to "protect" you from taxes
- Claiming only Federal Employees pay federal taxes
- Claiming you have no income and therefore no tax liability (when you clearly do)
How to Protect Yourself from IRS Tax Scams
Protecting yourself from tax fraud is a matter of being vigilant and mindful that there is always a possibility of something going wrong. Work with a trusted advisor or study up and file taxes yourself to avoid the uncertainty of allowing others to handle your financial matters. Often a bit of knowledge goes a very long way.
Know How the Tax System Works
One of the most common negative IRS reviews is that the tax refunds aren't released immediately. In many of these IRS reviews, customers complain that they don't get their refunds immediately. In this case, for example, an IRS reviewer didn't file correctly the first time and was frustrated when additional work was required. She claims,
"First I got a letter demanding a 1095 a form and 8962 form which I provided immediately incorrectly, then Weeks Later got a letter saying I need to take and identity quiz online".
Finally her refund was approved, but due to the extra steps required she is told that IRS, "…can't see anything about my refund that it is in the processing Department and could take 9 weeks".
While frustrating to wait, the IRS is usually very clear about processing times and has never sent refunds immediately after the filing window opens. The government doesn't move quickly and reviews of documents and financial information submitted in your returns are necessary.
Additionally, relying on others to help you file your taxes every year can open you up to the possibility of fraudulent activities. Reviewing the tax codes and reading through the laws and requirements may not be exciting, but it will give you at least a basic understanding of how the process works, so that you can look out for problems if you are trusting someone else with your information and money.
Always Read Carefully
The safest way to file your taxes is to do them by hand on the original IRS paper forms and to mail them using certified mail. Many people don't choose to do this, however, as it can be very tedious and confusing if you do not know the tax system backwards and forwards.
Instead, many filers rely on tax software and paid tax preparers. When using software or allowing someone to use software on your behalf, it never gets too comfortable. There might be hidden fees in the software or glitches to overcome. Intuit reviews state that the Turbo Tax software had many hidden fees in the 2018 version and customers were frustrated.
This Intuit customer claims,
"This year, they forced me to pay $40 for their premium service bundle. I tried four times to process the order without it, and it kept adding the $40 back in. After a while, I finally paid it, just to be able to complete my taxes".
He didn't like being forced to buy additional services to use a product that should not require them and states, "I will definitely NOT be recommending this service to any friends. In fact, I have already warned several to stay away from them".
Other Intuit reviews offer similar stories of frustrations with hidden fees and Intuit software errors and glitches that caused issues. Reviewing choices carefully as the software takes you from screen to screen is a good way to avoid accidentally accepting hidden fees. Another option to avoid paying for fees you aren't comfortable with is to simply abandon the return on one piece of online software and to try again with another – there are multiple tax return software options available.
Always Look for Tax Filing Scams
If you always expect to find a scam, you'll never be surprised when one appears. Even tax preparers who have been in business for years can have some deceptive business practices that others assume are necessary or haven't noticed them at all.
H&R Block reviews, for instance, are noting heavy fees the company charges to file even a simple tax refund. In these tax service reviews, customers claim to have issues with unnecessary delays and large amounts of money deducted from their refunds. One H&R Block client had a direct deposit date from the IRS of February 22. According to the reviewer,
"It came and went. Yesterday i called H&R and he told me… Yes we received your money on the 22nd. We've taken OUR MONEY OUT. The notes here in the system says it's scheduled to be sent to your bank on the 25th".
The frustrated customer continued by saying, "Here it is the 25th. NOTHING! They sure were quick to take their money. But seem to have broken fingers when giving me mine".
He ends his review on a negative note, "I will never use H&R Block again. I would recommend to everyone else to stay away as well. Especially after the ridiculous fee they charged for it. Simple tax return cost over $300.00".
While companies are free to charge whatever their customers are willing to pay for tax filing services, the frustrated customer may have felt better about his return if he had shopped around a bit or tried filing it on his own using online software. Additionally, reviews about issues similar to his own may have warned him away from working with a company.
Tax time can be exciting if you're entitled to a large refund, but it can be stressful if you don't feel in control of the tax filing process. Educate yourself on the risks and tax scams that exist, and always exercise caution when choosing a method to file your taxes. Your personal information is closely tied to you money, so protecting both of them is often simple a measure of keeping eyes wide open and using your knowledge to avoid traps and scams.
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While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal, medical, accounting, investment, or any other professional advice as individual situations will differ and should be discussed with an expert and/or lawyer.