It’s April and you know what that means: It’s tax season once again. While people are scrambling to file their tax returns on time, scammers are also scrambling to dupe people of their hard-earned money or tax refund. Here are the most common tax scams employed by crooks.
Phishing
This is still the most popular tax scam out there because it doesn’t give victims direct contact with the criminals. What scammers usually do is send out legit-looking emails to unsuspecting persons. Actually, the emails are usually sent out randomly. Out of a thousand phishing emails sent, a few are bound to open them—some out of ignorance while others due to genuine concern about the information contained in the email. Usually, this email contains a link that you have to click, and which will then lead you to a bogus website. On that website, you are supposed to give out personal information that the scammers will use to dupe you. Other links are spyware or malware that will allow the scammers to get details from your computer themselves.
The most important thing you have to remember here is that the Internal Revenue Service (IRS) does not communicate via email. The agency always sends out letters of communication. But people usually fall for these fake emails because they seem real. For one, the subject usually makes it sound urgent, for example: IRS URGENT NOTICE or something similar. The email address also looks genuine: irs@yahoo.com. Again, remember that the IRS does not communicate via emails. So when you see an email that seems to be from the IRS, be suspicious right away. Do not open the email—but if you inadvertently open it, do not click on the links. Again, if you inadvertently clicked on the link, do not give out your personal details. You may forward these suspicious emails to phishing@irs.gov.
Phone scams
Intimidation usually gets people. That’s why phone scams, according to the IRS, have increased in recent years. This is because most of the scammers employ intimidation when they call people. The scammers usually call unsuspecting individuals and claim that they are from the IRS. To make it sound believable, the scammer would mention a badge number or some sort of identification number to prove that he works in the agency—unfortunately, there is no way for you to verify if what he is saying is true since you are on the phone. The scammer would then claim that you owe some money to the IRS. The threat would then follow: the scammer would claim that you would go to jail if you don’t pay your tax. If somehow the scammer realizes that you are an immigrant, he would then claim that you could be deported if you don’t pay your tax. When this happens, the best thing you could do is to say that you will refer this matter to a lawyer. If the caller insists—as he most definitely will—continue also to insist that you would rather speak to a lawyer first. You may also threaten right back at the caller and say that you know someone from the IRS and would rather speak to them than some stranger who claims to be from the IRS.
Identity theft
This is the most popular credit card scam out there. But it is also used for tax scams. Sometimes, this go hand-in-hand with the phishing and phone scams. So once you have given up personal information through the fake email or phone call, the scammer will then use your name, Social Security number and other personal information to file a tax return in a bid to get a tax refund. This is why you should never give up personal details that easily.
Over the years, the IRS has improved its ability to detect tax returns made by identity thieves. But the agency cannot always get everything, especially since criminals have also upped their game. As the IRS states: “Protect personal data. Don’t routinely carry a Social Security card, and make sure tax records are secure. Treat personal information like cash; don’t leave it lying around.”
Fraudulent charities
Most people want to help, and donating to charities seems like a good way to hit two birds with one stone: you get to help others and you lower your taxable income. If you really want to donate to charities, do so with organizations that already have a good reputation. But these are already big organizations, so if you want to help the smaller ones because they need it more, just make sure that you did your due diligence in researching the organization. Make sure it is legitimate and it really helps the marginalized sector. Also, be suspicious when charitable organizations ask for your personal details when you donate. The donation and receipt of donation should be as far as the exchange will go.
Unscrupulous tax return preparer
People are always busy making a living, and tax returns are not as easy as filling out a personal data sheet. Preparing a tax return can sometimes drain the life out of you and it would take days to complete as you have to go through receipts and documents. This is why around six taxpayers out of 10 rely on professional tax preparers to help them with their tax return. This is well and good as they also know better what to do. But how well do you know your tax preparer? There will always be some bad eggs in a whole tray. So make sure you know your tax preparer well. If you still don’t have one, ask a good friend to refer you to a good one. Or if you find a tax preparer, check out his credentials and research his reputation. One proof that your tax preparer is doing his job properly is if he signs the tax return he helped prepare. Employ only those who will affix their signature as well as their IRS Preparer Tax Identification Numbers.
Bloated refund claims
One thing that unscrupulous tax preparers do is inflate your tax refund claims through tax credits like the Earned Income Tax Credit and the Additional Child Tax Credit. These credits allow a taxpayer a bigger tax refund. So be careful with tax preparers who receive a fee based on percentage of the tax refund, they most definitely will inflate your claims to also bloat their fees. If you get caught, there will be potential jail time for you as well as penalty—then your tax refund won’t matter anymore.
Faking income to claim credit
Again, this is something that an unscrupulous tax preparer would do. Actually, this is also something a taxpayer can do himself. This is the process of bloating an income since only taxpayers with earned income can qualify for a refundable tax credit. Don’t even take the risk because doing so will mean a much-bigger financial burden if caught by the IRS. If caught, you would have to pay back the refund you received along with interest and penalties. It is also worth noting that falsifying your income is a crime so there might be legal repercussions along with the fine.
Padding tax return deductions
Every taxpayer is authorized to claim deductions—and there are a number of them. Of course, there are requirements and limitations for the deductions that you have to abide by. But of course, taxpayers want more so they could be tempted to overstate deductions. Either that or the tax preparer does the padding to claim more deductions. Again, the financial consequence of such act could be more than the refund you have claimed. First of all, you would have to pay back the IRS the excess refund given to you along with penalties and interest. And then, you might have to face legal charges as well.
Inflated claims for business credits
Just like the other padding schemes, the IRS has ways in finding out if you have bloated your business credits by reporting some bogus ones. Every entity is entitled to business credits, but report only what is due to the business or the repercussions will be dire. The few credits you will earn will not be worth the penalty as well as the shame.
Offshore tax avoidance
Make sure you report foreign investments because not doing so is illegal. There will be civil and criminal repercussions for foreign accounts and investments that are not reported to the IRS. It is a form of tax evasion since these investments are taxable. Not reporting them means you are evading the tax responsibility.
Silly tax arguments
Have you heard of the man who refused to pay taxes just because he thinks his tax money is being used to fund abortion in the US? Well, don’t try to follow in his footsteps because while the First Amendment demands that your beliefs should be respected, the law also states that it is every citizen’s responsibility to pay tax as it is the lifeblood of the government.
Do not abuse tax shelters
Just pay the appropriate amount of tax and you will not be in any trouble. There is no such thing as permanently avoiding taxation. So if anyone offers you that through tax shelters, just say no.
Know that these scams, which the IRS dubs as the “Dirty Dozen,” can hit you anytime of the year. So don’t just be wary of them during tax season. These scams, though, peak during tax season, which is why the IRS often issues warnings ahead of the tax season. The most important shield against scams is information. If you are knowledgeable about how these scams work, then chances are you will not be duped.