There’s no end to the creative ways scammers will try to steal your identity and your money. And tax time is one of their favorite times of the year. Here’s how to spot a top scam and protect yourself.
Fake IRS phone calls
If someone calls claiming to be an IRS agent and tells you to send money, hang up.
It’s a scam that tops the IRS’s 2015 “Dirty Dozen” list of tax scams.
Here’s how it works: Scammers change caller ID numbers to make it look like they’re calling from the IRS. They often threaten vulnerable people, like the elderly and new immigrants, with arrest, deportation or the loss of a driver’s license.
The scammers use common names and may say they are from the IRS Criminal Division. They may claim to know the last four digits of your Social Security number. Or they may say you have a refund due and ask you for personal information to claim it.
If they’re demanding payments, however, they may send follow-up emails appearing to be from the IRS, saying payments be made on prepaid debit cards.
The real IRS wouldn’t call when first contacting you. And it never demands payment or asks for credit card or debit numbers over the phone. Nor does it ask for personal or financial information by email, text or social media.
If you get what you suspect is a scam call, report it to TIGTA through its web site or call 800-366-4484.
Phishing and other fake IRS emails
Tax scammers are sending out so-called “phishing” emails that appear to be from the IRS and claim that the recipient either owes money or is due a refund.
Their goal: to get you to give up your address, Social Security, credit card, or bank account number or any other valuable information that lets them steal your identity or your money.
Do not bite.
“The IRS won’t send you an email about a bill or refund out of the blue. Don’t click on one claiming to be from the IRS that takes you by surprise,” said IRS Commissioner John Koskinen in a statement.
Nor does it ask for personal or financial information by text, social media or email.
If you get an unsolicited email that seems to be from the IRS or a related agency, such as the Electronic Federal Tax Payment System (EFTPS), don’t reply, don’t open attachments and don’t click on links. Doing so can enable scammers to collect your personal information or infect your computer with malicious code.
Instead, report the phishing email by sending it to phishing@irs.gov.
Stolen refunds
Identity thieves are stealing people’s Social Security numbers and other personal information to file fraudulent tax returns and claim their refunds.
The scammers typically file early in the season, beating you to the punch. And when you file, that may be the first time you learn your identity has been stolen.
To help prevent identity theft, don’t carry your Social Security card or documents displaying your Social Security number or Individual Taxpayer Identification Number (ITIN). And don’t give out your Social Security number just because a doctor’s office or other business asks.
Use firewalls and anti-virus software to protect your computer from being hacked, update security patches and frequently change your online passwords.
Checking your credit report once a year, as well as your Social Security earnings statement, can offer some indication whether anything unusual has been reported in your name.
And never give out personal information over the phone, by email or online, unless you’ve initiated the contact and know who you’re dealing with.
The IRS has more information here on how to protect yourself against identity theft and what steps to take if it has.
Shady tax preparers
If someone calls claiming to be an IRS agent and tells you to send money, hang up.
It’s a scam that tops the IRS’s 2015 “Dirty Dozen” list of tax scams.
Here’s how it works: Scammers change caller ID numbers to make it look like they’re calling from the IRS. They often threaten vulnerable people, like the elderly and new immigrants, with arrest, deportation or the loss of a driver’s license.
The scammers use common names and may say they are from the IRS Criminal Division. They may claim to know the last four digits of your Social Security number. Or they may say you have a refund due and ask you for personal information to claim it.
If they’re demanding payments, however, they may send follow-up emails appearing to be from the IRS, saying payments be made on prepaid debit cards.
The real IRS wouldn’t call when first contacting you. And it never demands payment or asks for credit card or debit numbers over the phone. Nor does it ask for personal or financial information by email, text or social media.
If you get what you suspect is a scam call, report it to TIGTA through its web site or call 800-366-4484.
Hidden money offshore
U.S. tax filers who have offshore accounts and don’t report them — or who naively fall for scammers selling an offshore tax scheme — may face large fines and penalties, the IRS warned.
The agency said it has carried out thousands of audits of offshore schemes and pursued charges that have resulted in “billions of dollars in criminal fines and restitutions.”
“Taxpayers are best served by coming in voluntarily and getting their taxes and filing requirements in order,” said IRS Commissioner John Koskinen.
To get people to fess up, the agency has an Offshore Voluntary Disclosure Program. Taxpayers who voluntarily report previously undisclosed offshore accounts may see penalties reduced and avoid criminal prosecution.
Plus, a new set of reporting rules are being phased in under the Foreign Account Tax Compliance Act that will require foreign financial institutions to report accounts held by U.S. citizens to the IRS. It’s similar to the way your bank here might send a 1099-INT form to the agency, reporting the interest income you earned, or your employer sending the IRS your W-2 at tax time.
Promises of ‘outlandish’ refunds
Scammers posing as tax preparers lure in clients with promises of “outlandish” tax refunds, the IRS said.
“[They] prey on people who do not have a filing requirement, such as low-income individuals or the elderly,” the agency warned.
They also hit up people who do have to file and expect a refund. The scammers will promise to get them a much bigger one by telling them they are entitled to tax breaks they don’t ordinarily take – such as the Earned Income Tax Credit or the American Opportunity Tax Credit. Or the scammer may promise an outsized refund on the basis of fictitious government benefits or rebates.
These scammers may ask you to sign a blank return or not give you a copy of the return he files for you. Or he may tell you that your refund should be deposited directly into his account first, and then he’ll deduct his fee from it before paying you.
If you fall prey to this scam, you’ll not only lose out on the refund you are legitimately owed. You may also have to pay penalties for filing a false claim and getting a fraudulent refund.
Fake charities
Taking advantage of your goodwill and pocketing your donations is Mission No. 1 for fake charities.
The IRS warned taxpayers not to be suckered into giving money to any group until confirming it’s legitimate.
Fake charities often use names that sound like well-known ones, and make their websites look similar.
The IRS recommends using its Select Check tool, though it is not the most user-friendly. As a backup, look up the organization on Charity Navigator.
Never give your personal financial information, such as your Social Security number, to anyone asking for money, the IRS warned. And if you’re going to make a donation using your credit card, only do so with an organization you trust.
Also, never give or send cash – which is catnip for scammers. To make a tax-deductible contribution, pay by check or credit card, so you have a record of the payment. The charity should also send you a receipt.
And be extra cautious when asked to help victims of a natural disaster. Scammers claiming to represent a charity may phone or email you to ask for money or financial information, the IRS said.
Preparers that lie for you
If you let a tax preparer understate your income to lower your tax bill or get you a bigger refund, you could be in big trouble with the IRS.
“The mere suggestion of falsifying documents to reduce tax bills or inflate tax refunds is a huge red flag when using a tax preparer,” IRS Commissioner John Koskinen said in a statement.
One common way this scam is perpetrated is when a shady preparer creates a “corrected” 1099 or W-2 form that claims your taxable income is actually zero, the IRS said.
Or the preparer may ask you to sign a statement that rebuts the income and tax information reported to the IRS by your employer or another third-party.
Bottom line: Never let anyone talk you into claiming deductions or credits to which you’re not entitled. And never let others file a false return on your behalf.
The act of filing a false return can lead to a $5,000 penalty, the IRS said. And your participation in a scam of this kind may also lead to interest and penalties on any back taxes you might owe — and possibly criminal prosecution.
Promoters of abusive tax shelter
When someone tries to sell you a complicated scheme that promises to slash or eliminate your tax bill, think twice.
Scam promoters set up abusive tax shelters in which they move your income-producing assets — including businesses you own — into a trust, limited liability company (LLC), limited liability partnership (LLP), international business company (IBC), or foreign financial account.
The IRS said it also has been seeing frequent misuse of “captive insurance” arrangements.
Regardless of the structure, however, the basic idea is this: Once you put your assets into the shelter, a string of complicated transactions are conducted solely for the purpose of hiding your money from taxes and making it look like you can claim fat deductions, escape self-employment taxes, and shift money out of your taxable estate.
Sometimes taxpayers themselves perpetrate this scam. But business owners, physicians and other high net-worth filers can be snookered by someone who backs up a scheme with official-looking documents to make it seem legal.
Ask the promoter whether he’s collecting a referral fee, and get a second opinion about the set up from a trusted, independent tax advisor.
If you get caught, it could mean large penalties, interest and even criminal prosecution.
Big tax credits you don’t qualify for
Cheating on your taxes usually means understating your income. But sometimes an unscrupulous tax preparer will try to inflate clients’ income, the IRS said.
Here’s why: Some people make too little to owe federal income taxes, but may still qualify for a refund by claiming certain refundable credits, like the Earned Income Tax Credit (EITC).
To make sure their clients get the maximum – and they get a bigger fee – shady preparers will report that clients earned more than they did.
For instance, a couple with two kids who earned between $13,650 and $23,300 in 2014 could get $5,460 from the EITC, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting US.
But if they earned less than $13,650, they wouldn’t get that max refund.
But by falsely inflating their income to, say, $14,000, they could get the $5,460.
The Child Tax Credit may also be abused in this way. The refundable portion of CTC is tied to earned income and is meant to help offset the cost of children for low-income families.
If caught, however, tax filers will have to repay the erroneous refund, plus interest and penalties.
A pumped up fuel tax credit
For all the gas you buy, chances are good you can’t claim a credit on your 1040 for the federal fuel taxes you paid.
Eligibility rules for the fuel tax credit are pretty limited: Do you run a commercial fishing boat? A farm? A school bus company?
If not, you probably don’t qualify.
And yet, shady tax preparers push the idea.
“The IRS routinely finds unscrupulous preparers who have enticed sizable groups of taxpayers to erroneously claim the credit to inflate their refunds,” the agency said.
Identity thieves, too, have been known to file a fraudulent return for a business or farm to claim the credit.
You only need a log of the date and place where you bought the fuel, but you’re not required to provide receipts.
The only way that lack of evidence would be discovered is if the IRS decides to audit you, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting US.
If the IRS sniffs out a fraudulent or inflated fuel tax credit claim, the penalty is $5,000. And penalties, interest and possible criminal prosecution may be on the menu, too.
A ‘frivolous’ tax return
Wild notions of what’s legal can be amusing, but when it comes to taxes, they’re a problem.
Plenty of scam artists try to convince fee-paying tax filers that they don’t owe any income tax at all by making what the IRS calls “frivolous tax arguments.”
Among them: Filing and paying your taxes is voluntary. You may refuse to pay taxes on religious or moral grounds by invoking the First Amendment. Only federal government workers owe income tax.
Then there’s this doozy: You don’t owe federal income taxes if you file a return saying that you have no income and no tax liability. People apparently do this despite having recorded taxable income through, say, a paycheck. And they often ask for a refund of the taxes their employer withheld, the IRS said.
Taxpayers may contest their tax liabilities. “But no one has the right to disobey the law or disregard their responsibility to pay taxes,” the IRS noted.
If you file a frivolous return — or let someone else do so for you – you’ll pay a $5,000 penalty for the privilege. You could also face accuracy-related penalties, a civil fraud penalty, and an erroneous refund claim penalty among others.