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Top 6 Tax Scams and How to Protect Yourself

What are the top tax scams and how to protect yourself? Today, we would like to focus on the top 5 tax scams anyone needs to be aware of. With so many scammers out there trying to take advantage of the unsuspecting consumer, learning about how you can become a victim of a tax scam is crucial. Some of the following scams have been around for years, but others just recently become more and more frequent. Read below to find out everything you need to know about the top tax scams and how you can protect yourself. Read also the 10 Most Corrupt Countries In The World.

Top Tax Scams and How To Protect Yourself

No. 6: False Promises of “Free Money” From Inflated Refunds

Here is how IRS explains this scam:

Scam artists routinely pose as tax preparers during tax time, luring victims in by promising large federal tax refunds or refunds that people never dreamed they were due in the first place.

Scam artists use flyers, advertisements, phony store fronts and even word of mouth to throw out a wide net for victims. They may even spread the word through community groups or churches where trust is high. Scammers prey on people who do not have a filing requirement, such as low-income individuals or the elderly. They also prey on non-English speakers, who may or may not have a filing requirement.

Scammers build false hope by duping people into making claims for fictitious rebates, benefits or tax credits. They charge good money for very bad advice. Or worse, they file a false return in a person’s name and that person never knows that a refund was paid.

Scam artists also victimize people with a filing requirement and due a refund by promising inflated refunds based on fictitious Social Security benefits and false claims for education credits, the Earned Income Tax Credit (EITC), or the American Opportunity Tax Credit, among others.

The IRS sometimes hears about scams from victims complaining about losing their federal benefits, such as Social Security benefits, certain veteran’s benefits or low-income housing benefits. The loss of benefits was the result of false claims being filed with the IRS that provided false income amounts.

While honest tax preparers provide their customers a copy of the tax return they’ve prepared, victims of scam frequently are not given a copy of what was filed. Victims also report that the fraudulent refund is deposited into the scammer’s bank account. The scammers deduct a large “fee” before cutting a check to the victim, a practice not used by legitimate tax preparers.

The IRS reminds all taxpayers that they are legally responsible for what’s on their returns even if it was prepared by someone else. Taxpayers who buy into such schemes can end up being penalized for filing false claims or receiving fraudulent refunds.

Taxpayers should take care when choosing an individual or firm to prepare their taxes. Honest return preparers generally: ask for proof of income and eligibility for credits and deductions; sign returns as the preparer; enter their IRS Preparer Tax Identification Number (PTIN); provide the taxpayer a copy of the return.

Beware: Intentional mistakes of this kind can result in a $5,000 penalty.

No. 5: Hiding offshore accounts

This is not a scam that can be done to you, but one that quite a few Americans engage in. Even though US citizens are allowed to maintain some of their finances abroad, they are a series of reporting requirements they need to comply with. Anyone who fails to comply with these said requirements is in breach of the law and can be subject to substantial fees or penalties and, in some cases, even criminal prosecution. Here is what IRS says about this scam:

“While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.

Since 2009, tens of thousands of individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore is increasingly more difficult.

At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The IRS works on a wide range of international tax issues with DOJ to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

The IRS has collected billions of dollars in back taxes, interest and penalties so far from people who participated in offshore voluntary disclosure programs since 2009. It is in the best long-term interest of taxpayers to come forward, catch up on their filing requirements and pay their fair share.”

No. 4: Tax preparer frauds

Over half of all taxpayers choose to have a tax professional handling their refunds. While the vast majority of tax professionals will ensure the utmost quality of services, there are some who will prey on the unsuspecting client. If you choose to have a tax professional handling your paperwork, ensure that they provide you with their Preparer Tax Identification Number, which will confirm that they have been approved by the IRS. Don’t forget you are the one who is legally responsible for what’s on your tax return even when it is prepared by someone else.

No. 3: Telephone scams

Over the past years, the IRS has registered an increased frequency of telephone scams across the US. Typically, the caller will pretend to be calling on behalf of the IRS and will try to scam the respondent by asking for their social security number or other important data. Never release any important information over the phone and if you happen to get a call by someone pretending to be the IRS, make sure you contact the agency immediately and report the incident. Here is how IRS summarizes these scams:

“These phone scams include many variations, ranging from instances from where callers say the victims owe money or are entitled to a huge refund. Some calls can threaten arrest and threaten a driver’s license revocation. Sometimes these calls are paired with follow-up calls from people saying they are from the local police department or the state motor vehicle department.

Characteristics of these scams can include:

  • Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
  • Scammers may be able to recite the last four digits of a victim’s Social Security Number.
  • Scammers “spoof” or imitate the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
  • Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
  • Victims hear background noise of other calls being conducted to mimic a call site.

After threatening victims with jail time or a driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.”

No. 2: Phishing e-mails

The most common phishing tax scam involves receiving unsolicited e-mails that appear to have been sent by the IRS. Often, the e-mail will forward you to some website where you could allegedly claim your refund in exchange for your taxpayer’s information. However, as the IRS has clearly stated on several occasions, the agency will never ask you to disclose any personal information via e-mail, so make sure you send such claims directly to your “Trash” folder.

No. 1: Identity theft

Although identity theft has been around for quite some time, we should be seeing an increase of this activity in 2014. More often than not, identity theft refers to the use of a taxpayer’s identity so as to illegally claim a tax refund. The only way someone can claim your identity is if they somehow get their hands on your social security number, so make sure you protect this very valuable information. Here is what IRS says about identity theft:

“The IRS has a special section on IRS.gov dedicated to identity theft issues, including YouTube videos, tips for taxpayers and an assistance guide. For victims, the information includes how to contact the IRS Identity Protection Specialized Unit. For other taxpayers, there are tips on how taxpayers can protect themselves against identity theft.

Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure their tax account. Taxpayers can call the IRS Identity Protection Specialized Unit at 800-908-4490. More information can be found on the special identity protection page.”

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