Tax season is in full swing and that means it’s prime time for criminals looking to take advantage of unsuspecting victims. Fraudulent tax schemes can take many different forms, oftentimes leaving taxpayers unaware that they’ve been duped until it’s too late. Every year, the Internal Revenue Service compiles its “Dirty Dozen” list, detailing the worst tax scams for consumers. If you haven’t filed your taxes yet, here’s what you need to be on the lookout for.
For the third year in a row, identity theft leading to tax fraud tops the Dirty Dozen list. Thieves gain access to your personal information, including your name and Social Security number, and then use it to file a fraudulent tax refund in order to claim a refund. Over the last few years, the IRS has stepped up its efforts to try and combat identity theft, which affected 1.6 million taxpayers in the first six months of 2013 alone. The agency offers tips and information on how to protect yourself against tax identity theft in a special section of its website.
For 2014, the IRS has a noted an increase in telephone scams involving callers who pretend to be IRS representatives. Scammers may tell victims that they owe back taxes or are entitled to a big refund. In some cases, the caller will threaten victims with arrest or loss of their driver’s license if they don’t pay up. Victims may be directed to pay their outstanding tax bills through a wire transfer or prepaid debit card or provide their bank account information over the phone. If you get a phone call that seems suspicious you can report it to the Treasury Inspector General for Tax Administration by calling 1-800-366-4484.
Phishing scams involve the theft of your personal or financial information through the use of emails or fake websites. Typically, victims receive an unsolicited email requesting information or asking victims to visit a specific site. By clicking on links included in the email, victims inadvertently install spyware or malware on their computers, allowing criminals to track you online. In some cases, scammers disguise themselves as legitimate companies or agencies, including the IRS. If you suspect a phishing scam, you should forward the email or link to firstname.lastname@example.org.
“Free Money” Scams
If you’re planning to hire someone to do your taxes, you need to be aware of scammers who try to lure victims in with promises of inflated refunds. Typically, scam artists use flyers or advertisements to drum up business and they may target low-income individuals, the elderly and non-English speakers. Criminals tell their customers they can get them a much bigger refund than they’re entitled to by filing a return filled with claims for credits they don’t actually qualify for. By the time the victim catches on, the crooks have already made off with a hefty fee. Keep in mind that if you participate in this kind of tax scam intentionally, you could be on the hook for a $5,000 penalty.
Return Preparer Fraud
According to the IRS, approximately 60% of taxpayers will seek out professional help when it’s time to file their taxes. If you choose a tax professional who engages in unethical or criminal behavior, you could end up paying the price once the IRS gets wind of it. Before you hand over your personal information to a tax pro, check to make sure they have an IRS Preparer Tax Identification Number and don’t do business with anyone who refuses to sign a return they’ve prepared.
Charitable Organization Scams
Donating money to charity can score you a big tax deduction but only if you’re dealing with a legitimate organization. One of the most common tax scams involves criminals posing as charities in an attempt to solicit donations. These schemes are especially common following a natural disaster or catastrophic event. Before you hand over your hard-earned cash to a charity, use the IRS Exempt Organizations Select Check tool to make sure it’s legit.
Offshore Tax Scams
These scams typically involve hiding money in an offshore account in order to avoid paying the full amount of tax due. If the IRS determines that you willingly participated in this type of scam you could be subject to stiff penalties and even criminal prosecution.
If you make a claim to try to avoid filing a tax return or paying taxes owed, the IRS may deem it a frivolous argument. Examples of frivolous arguments include claims that filing taxes is voluntary or that certain types of compensation you receive shouldn’t be counted as income. If you use these or any other superfluous arguments to try to evade the tax man, it could mean a fat penalty or even jail time.
Misuse of Trusts
Trusts are legal entities that are designed to help you protect certain assets and they’re also a useful tool for tax planning. Willfully misusing a trust to hide assets or income for the purposes of tax evasion, however, may land you in hot water with the IRS.
Abusive Tax Structures
Abusive tax structure schemes typically involve setting up multiple limited liability companies for the purpose of hiding assets from the IRS. These types of scams are on the rise but beware that you risk criminal prosecution if you’re considered a willing participant.
False Income, Expenses or Exemptions
Inflating your income or expenses in order to take advantage of refundable tax credits is a big no-no with the IRS. You may be able to qualify for certain credits by bumping up your income but you face a substantial penalty if you’re caught.
Falsely Claiming Zero Wages
At the other end of the spectrum are scams that involve filing a federal form 4852 or a corrected 1099 in order to reduce income to zero. Filing fake forms may net you a big refund check but you’ll have to pay it back with penalties and interest should the IRS take notice.
When it comes to filing your taxes, a little common sense can help you avoid any major pitfalls, including falling victim to a scam. Just keep in mind that if something seems too good to be true, then it probably is and you should do your best to steer clear.