Common Tax Scams & Tips for Avoiding Fraud

Tax Scams And Fraud Prevention

With Tax Day fast approaching, we’re all aware that our personal finances will be under the microscope for the foreseeable future. Unfortunately, not everyone parsing our private information will have the requisite authority to do so, as the history of tax fraud is just as long as that of taxes.

In order to avoid the monetary loss, credit score damage, and inconvenience that are so often byproducts of tax malfeasance, consumers must understand not only what the most common types of tax fraud are, but also how to thwart them.

Tax Scams and Fraud

  • Fraudulent Returns (Identity Theft):  With a few key pieces of information about a consumer – such as a name, Social Security Number, and/or address – fraudsters can file a tax return on their behalf so as to ultimately pocket any corresponding tax refund.  The IRS estimates that it will lose $26 billion as a result of fraudulent refunds during the five-year period from 2012 through 2016.

“The idea of someone doing your taxes for you would ordinarily be pretty appealing.  In fact, it’s something you’d typically have to pay for,” said Odysseas Papadimitriou, Card Hub’s CEO and a widely-respected personal finance expert.  “That’s definitely not the case when it comes to fraudulent tax returns, though.  Not only could this type of redundant filing mess with your refund, but it will also likely trigger an inconvenient investigation process to be undertaken by the IRS.  So, don’t ignore the warning signs:  a letter from the IRS about multiple returns, inconsistencies in your records, or perhaps more relevant these days, an e-file attempt that gets bounced.  That last one bears repeating:  If you try to file online and are unable to do so, that could be an indication that a fraudster has already filed a return under your name.  With that said, the best ways to prevent a fraudster from filing under your name are to take commonsense steps to safeguard your personal information — such as making sure your computer has the latest security software — and to file as early as possible in order to minimize the window of opportunity for fraud.”

  • Phishing:  Posing as IRS agents, accountants, and other types of legitimate financial professionals, fraudsters often contact consumers and attempt to glean from them sensitive financial information, which they can then exploit for profit.

“Phishing is perhaps the easiest type of tax fraud to avoid,” according to Papadimitriou.  “All you have to do is ignore e-mails and phone calls from people purporting to be trustworthy financial officials.  No one who is on the up and up is going to contact you proactively and ask for account numbers, passwords, or any other sensitive personal financial information.  So, ask the callers to take you off their lists, don’t even open e-mails from people you don’t know, and you’ll be fine.”

  • Illegitimate Relief / Servicing Companies:  Countless companies claim the ability to “find hidden deductions,” “negotiate with the IRS on your behalf,” or pretty much aid you in any other way that might sound even remotely legitimate.  Many of them, unfortunately, are just seizing an opportunity to charge you high fees for empty promises, while using creative contract language to limit the need for tangible results, shield themselves from liability, and prevent customer recourse.

“We’ve all seen the budget TV spots and heard the radio ads that spew promises of tax salvation followed by a jet stream of fine print. Some of them may even offer modest results due to sheer familiarity with the tax collection process.  Many others, however, simply gouge your bank account without really doing anything to improve your financial situation,” says Papadimitriou.  “You don’t want to waste a whole lot of time, money, and expectation only to find out that – ‘oops, you’re not eligible for this’ or ‘we can’t do that because….’.  The easiest way to ensure that doesn’t happen is to write such companies off entirely as not cost-effective.  Short of that, just make sure to do your homework before signing anything.  That means researching a company’s reputation, checking reviews, and reading anything that requires a signature very carefully before putting pen to paper.”

Tips for Consumers

The good news for consumers is that the tax-fraud prevention playbook differs very little from that which concerns other common types of financial foul play.  That’s why, aside from a few tax-specific recommendations, the following tips will prove helpful in securing the breadth of your financial life.

  • Order a Tax Transcript:  Since the IRS will give you a free copy of your records upon request, you can compare your reported income with what they have on file to make sure there aren’t any inconsistencies (which might indicate fraud).  All you have to do is fill out this simple form.
  • Check Your Credit Reports:  Carefully analyzing your credit reports on a regular basis will allow you to spot fraudulent activity, such as financial accounts opened under your name without consent.  By strategically leveraging your annual right to a free copy of each of your three major credit reports (i.e. Experian, Equifax, and TransUnion), you’ll be able to do a quarterly check.
  • Review Your Monthly Bills:  This will help you spot unauthorized transactions, services for which you’re paying but did not request, and other financial breaches that could speak to more serious types of fraud or overall vulnerability.
  • Inform Relevant Parties of Lost/Stolen Cards:  Promptly reporting a lost or stolen Social Security card, credit card, debit card, etc., will limit criminal access to your sensitive financial information and thereby prevent an obvious case of fraud from having wide-reaching financial consequences.  For example, people who lose their Social Security Cards should notify the IRS Identity Protection Unit (1-800-908-4490) so it can prevent the SSN from being misused for fraudulent tax returns.
  • Use the “Too Good to Be True” Test:  To some extent, we’re all inclined to be optimistic and to believe the sales pitches we see on TV and hear on the radio – especially if they offer simple solutions for complicated problems. More often than not, however, there won’t be any gold at the other end of these glittery promises.  So, before signing up for any cure-all program, make sure to ask yourself:  1) Is this too good to be true? and 2) If it’s really that good, why isn’t everyone doing it?
  • Know Who You’re Talking To:  You should be on the lookout for two distinct types of predatory financial companies:  1) those impersonating trusted sources; and 2) those offering shady services directly under their own brand names.Both types are fairly easy to avoid:
    • Impersonators:  You can never be 100% sure of who you’re talking to if they’re the ones who reached out first, so it’s important to view unprompted solicitations for financial information with suspicion.  The risk of impersonation is precisely why the IRS never sends out e-mails and no reputable financial company will ever call or e-mail you asking for personal information.  So, keep things simple and never disseminate financial information to companies you did not reach out to first.
    • Service Providers:  Always make sure to do at least some minor background research on any financial company or professional that you do business with.  Basic steps such as reading customer reviews and searching a company’s name online will go a long way in helping you steer clear of unscrupulous companies.
  • Read the Fine Print:  It’s obviously important to read any contract carefully before signing it, but it’s especially important when dealing with tax companies given the sheer number of questionable players in the market.  Make sure you know exactly what is required of both you and the service provider, when payments are expected, and what your consumer rights are.
  • Make Sure Private Information Stays Private:  In this day and age, there is both digital and physical information about everyone.  There are also prying eyes when it comes to both.  That’s why it’s so important to take the following basic precautions which collectively prevent your financial info from falling into the wrong hands:
    • Only enter payment information on “https” URLs.
    • Never send account numbers and/or passwords through e-mail.
    • Use passwords that combine numbers, letters, and special characters and change them on a regular basis.
    • Make sure your computer has up-to-date security software.
    • Lock your mailbox to prevent identity thieves from stealing information, such as pre-approved credit card applications, that they can ultimately use to spend money under your name.
    • Shred financial documents before throwing them away to protect against fraud borne from dumpster diving (which is actually more common than you’d think).

Ask The Experts

For more insights into tax fraud and how you can avoid becoming a victim, we turned to a pair of experts on the subject. You can check out the questions we asked them below and you can see their response by clicking on their names.

  1. Is tax fraud something people should be worried about?
  2. What are the best ways to avoid tax fraud?


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Lee G. Knight

Hylton Professor of Accountancy, School of Business, Wake Forest University

Is tax fraud something people should be worried about?

The incidents of tax fraud have steadily risen, so yes, people should worry about tax fraud. The number one cause of tax fraud is identity theft, which occurs when someone uses a taxpayer’s personal information—name, address, social security number (SSN), and other identifying information—to file a phony tax return for a refund.

Taxpayers who fear an IRS audit often fall prey to identity theft because they forget to take the normal steps to safeguard their identities. For example, victims often willingly turn over personal information when an impersonator of an IRS agent calls taxpayers saying they owe money, and then threatens them with jail time, the loss of their business or driver’s license, or deportation if they are a recent immigrant if they fail to pay the money requested. Phishing, which usually involves an unsolicited email from an IRS impersonator or a fake website posing as a legitimate IRS website, often is used to obtain the personal information needed to file the false return.

Once identity theft is reported to the IRS, the victim may get his or her refund, but not before going through a lengthy process that requires the victim to file multiple affidavits and gives the IRS time to investigate the fraud. This process can take up to 180 days, and until the fraudster is caught, the victim must take steps to prevent further illegal use of their personal information.

While Identity theft is the most prevalent vehicle for tax fraud, other types of tax fraud, such as the following, should concern taxpayers:

• Loans with high interest rates and fees given to taxpayers in anticipation of the tax refunds

• Tax preparers who promise unreasonably large refunds

• Companies who charge large up-front fees in exchange for helping taxpayers manage payments when they owe large sums of back taxes

• Sham charities that solicit tax deductible cash donations, but fail to provide charitable assistance or are not charitable organizations qualified by the IRS for tax deductions

• Tax shelters that promise to eliminate or substantially reduce a person’s tax liability through sophisticated strategies that lack economic substance

What are the best ways to avoid tax fraud?

1. Protect your personal information! Don’t let fear of the IRS overtake your better judgment. The IRS will never contact taxpayers via email or telephone, and IRS agents should not threaten taxpayers

2. Check your bank statements and credit reports frequently for inaccuracies.

3. Contact the IRS immediately if you suspect identity theft or any other tax –related fraud.

4. Check the credentials of your tax preparer. All authorized tax preparers will have an IRS-issued Preparer Tax Identification Number (PTIN), so make sure it is included with the tax preparer’s signature on your tax return.

5. Do not sign your return without reviewing it and make sure you receive a copy of the return.

Carefully check, or request a financial expert to check, any arrangement promising to eliminate or substantially reduce your tax liability. Investors who knowingly invest in abusive tax schemes will be investigated and penalized for their participation in the scheme.
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Philip Cary Christian

Assistant Professor, Institute for Public and Nonprofit Studies (IPNS), Georgia Southern University

Is tax fraud something people should be worried about?

I generally work on tax fraud from the government side: catching taxpayers who commit fraud. But these days there is plenty for taxpayers to worry about as well. Identity theft is the primary concern. If someone steals your identity to file a return in your name and claim a refund, you will not be able to file your own return until the identity theft issue is resolved. If you are due a refund, you may have to wait up to a year to get your account cleared. The IRS is devoting more resources to this issue and wait times are apparently beginning to drop, but the situation is still difficult to manage and the IRS budget has been cut, which does not help in resolving this issue.

The best defense for this type of fraud is to protect your identity. Be mindful of the websites you visit. Do not visit or purchase from a website you know nothing about. Make sure you use antivirus software, preferably one that also checks the links you visit for threats, and use a firewall. These tools are easier than ever to use at this point and several totally free options are available that do a wonderful job. There is no excuse for anyone to be without these tools! Finally, watch what you post on social media. Even with privacy filters on you will find it is quite easy for your personal information to get disseminated far and wide. Be very selective of the information you allow to be published, even in a forum where you think only your friends and relatives can see it.

Image: PTstock/Shutterstock

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