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

  1. 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.
  2. “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, CardHub 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.
     

  3. 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.
  4. “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.” In other words, 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.
     

  5. 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.
  6. “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 right to a free annual credit report from each of the major bureaus (i.e. Experian, Equifax, and TransUnion), you’ll be able to do a quarterly check – at the very least. You may also want to explore non-government free credit report providers and potentially look into credit monitoring as well.
  • 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. Are there any particular tax scams people should be on the lookout for this year?
  3. What are the best ways to avoid tax fraud?
  4. What would you tell someone who is considering perpetrating a tax scam of their own — whether it’s minor (e.g. misstating their income) or more elaborate (e.g. stealing someone’s refund)?

 

Back to All Experts

Kelly J. Strader

Professor of Law, Southwestern Law SchoolIs tax fraud something people should be worried about?

Yes! The explosion in identity thefts means that they are more and more ways for taxpayers to be defrauded. The means range from the old-fashioned (theft of tax return information from mailboxes) to the sophisticated electronic theft of your taxpayer information.

Are there any particular tax scams people should be on the lookout for this year?

One common scam is to intercept a tax return, change the information, and steal tax refunds by having them deposited into the thieves' bank accounts.

What are the best ways to avoid tax fraud?

Do not leave tax returns in your outbound mail box. Take them to the post office or file electronically. If you file electronically, be sure to have security software up-to-date on the computer from which you file. Do not file using a Wi-Fi connection from a location that is not secure.

What would you tell someone who is considering perpetrating a tax scam of their own -- whether it's minor (e.g. misstating their income) or more elaborate (e.g. stealing someone's refund)?

Even a "minor" misstatement on a tax return -- if it's made knowing that you are not providing truthful information -- can lead to very serious felony tax fraud charge of filing a false tax return. And if you make affirmative efforts to evade taxes (by, for example, hiding money or information), then you have committed the felony of tax evasion. Even simply failing to file a return is a misdemeanor.
Back to All Experts

Margaret Drew

Associate Professor of Law, University of Massachusetts Dartmouth, School of LawIs tax fraud something people should be worried about?

Absolutely. With the advent of electronic filing of income tax returns, more identity fraud has occurred where individuals file false tax returns under a stolen taxpayer identity and obtain refunds properly belonging to taxpayer who earned the income. Once this happens, a taxpayer can expect delayed future refunds, as the taxing authorities will establish several levels of security to ensure that any refund is being paid to the proper individual.

Are there any particular tax scams people should be on the lookout for this year?

There have been reports of taxpayers receiving calls from individuals who claim to be IRS employees. The callers claim that money is owed to the Service and then collect credit card information as the recipient of the call pays what he or she believes is money owed.

What are the best ways to avoid tax fraud?

Avoiding identity theft is becoming increasingly complex. Some advise filing as early as possible in the tax season so that a taxpayer is the first one filing with a particular identification number. Not being an expert in electronic identity theft, I am uncertain what other advice is effective, other than, of course, not to disclose credit card information or tax identification number information unless one is absolutely certain of the identity of the individual receiving the personal information.

What would you tell someone who is considering perpetrating a tax scam of their own -- whether it's minor (e.g. misstating their income) or more elaborate (e.g. stealing someone's refund)?

Don't do it. In practice I noticed an interesting pattern, particularly with some small business owners. Often the client would have misstated either income, or more typically deductions, in an effort to limit tax liabilities. But if the business owner had obtained professional, competent tax advice, s/he would have not only limited the amount of taxes owed but could have saved even more money through proper tax planning and strategy. Often, the audit situations resulted from a case of penny wise and pound foolish strategy.
Back to All Experts

Patricia Jaeger

Associate Dean and Professor of Taxation at University of Hartford, Barney School of BusinessIs tax fraud something people should be worried about?

Yes, people should be concerned personally as it also involves identity theft and they should be concerned as taxpayers since it results in millions of dollars in fraudulently issued refunds each year.

Tax fraud includes individuals and businesses falsely reporting items, such as deductions or tax credits, on a tax return, or not reporting income on a tax return. Tax fraud also includes schemes to encourage others to perpetrate tax fraud, tax preparer fraud, identity theft to file for refunds and failing to file a tax return.

Are there any particular tax scams people should be on the lookout for this year?

People should be on the lookout for emails supposedly sent by the IRS. The IRS does not contact taxpayers through email, text messages or through any type of social media. These are phishing scams requesting the taxpayer to click on links to capture personal information. The most recent version of this scam is an email that appears to be from the IRS Taxpayer Advocate Service and includes a fake case number with links to websites that request personal information.

People should also be aware of various telephone scams. The caller will pretend to be from the IRS and will even provide fake badge numbers. The caller may spoof the IRS toll-free number on the taxpayer’s caller ID and my even know the last four digits of the taxpayer’s Social Security number. These callers will make threats about taxes owed and possible jail sentences, and will frequently target immigrants with threats of deportation. The IRS will always send a written notification to a taxpayer through the U.S. mail before making any telephone calls and cannot threaten taxpayers. Do not provide these callers with any personal information. If you are uncertain whether or not you owe any taxes, call 1.800.829.1040 to speak to an IRS employee. You can also call the Treasury Inspector General for Tax Administration at 1.800.366.4484 to report such telephone calls.

The IRS has a lot of information about tax fraud on its website. The following pages are very helpful: What’s Hot; News Releases; Tax Fraud Alerts; Suspicious e-Mails and Identity Theft; and the annual Dirty Dozen that lists some of the more common tax fraud schemes.

If you receive an Identity Verification Letter you should go to idverify.irs.gov to respond. Notice that IRS websites have a domain of .gov for government.

Unsolicited emails that appear to be from the IRS can be forwarded to phishing@irs.gov but, do not click on any link in the email. If you come upon a suspicious website that is not part of the irs.gov website but claims to be connected to the IRS you can send the site’s URL by email to phising@irs.gov .

What are the best ways to avoid tax fraud?

The best ways to avoid tax fraud are the following:
  • Never respond to an email or click on any link that is supposedly sent by the IRS; either delete it or forward it to the IRS at phising@irs.gov;
  • Never provide any personal information on the telephone to someone claiming to be from the IRS if you have not first received a written notification through the U.S. mail concerning a tax issue. You can call 1.800.829.1040 if you’re unsure of the caller’s identity;
  • If the scheme sounds “too good to be true” it is most likely a tax fraud scheme; check the IRS website for news concerning tax fraud;
  • Be very careful if you hire someone to prepare your tax return. Tax preparation can be done by anyone as there are no educational or experience requirements. People should check out the IRS page on choosing a tax preparer wisely;
  • The IRS has many videos on YouTube that discuss possible tax frauds and how to protect yourself.


What would you tell someone who is considering perpetrating a tax scam of their own -- whether it's minor (e.g. misstating their income) or more elaborate (e.g. stealing someone's refund)?

I would tell him or her that the chances of being caught are high and that the IRS has a lot of authority to place liens on assets and to seize bank accounts and other assets. The IRS can also criminally prosecute anyone for various tax-related crimes. For fiscal year 2014, the IRS had an incarceration rate of 87.7% for identity theft and the average months served were 43. While criminal cases follow the basic “You’re innocent until proven guilty” scenario, in civil tax cases the burden of proof is on the taxpayer such that “You’re guilty until you prove you’re innocent”. Besides owing any back taxes, you would also be subject to penalties (some as high as 75% of the taxes owed) and interest.
Back to All Experts

Frank Doti

Professor of Law, William P. Foley Endowed Chair, Dale E. Fowler School of Law, Chapman UniversityIs tax fraud something people should be worried about?

Not so much anymore. I am referring to tax scam deals that are being promoted. But there is a real problem this year with bogus telephone calls claiming to be the IRS and asking for an immediate payment to avoid penalties. Identity theft and bogus telephone calls are a real menace, especially to seniors.

Are there any particular tax scams people should be on the lookout for this year?

Telephone calls from someone claiming to be an IRS agent. The IRS does not call a taxpayer by telephone.

What are the best ways to avoid tax fraud?

Hang up on any calls from someone claiming to be from the IRS.

What would you tell someone who is considering perpetrating a tax scam of their own -- whether it's minor (e.g. misstating their income) or more elaborate (e.g. stealing someone's refund)?

You may ruin your entire future career and may end up in jail. A tax fraud situation is the type of crime that will result in automatic disbarment of an attorney and loss of job status or future jobs for most everyone else involved in a financial type position.
Back to All Experts

Brian Hogan

Clinical Assistant Professor of Business Administration, University of Pittsburgh, Joseph M. Katz Graduate School of BusinessIs tax fraud something people should be worried about?

Tax fraud is something that people should be worried about for a number of reasons. On a general level, tax fraud costs the government billions of dollars a year on things such as fraudulent claims, as well as potential prevention. These costs are borne by U.S. taxpayers and also potentially decreases trust in the system itself. On an individual level, as discussed below, identify-theft fraud is something that is on the rise in the United States. As we continue to move towards offering more electronic opportunities (e-filing, etc.), the potential for fraud continues to grow. Many taxpayers depend on a timely refund. An identity thief can greatly increase the time and hassle of getting this refund.

Are there any particular tax scams people should be on the lookout for this year?

Identity-theft fraud, in which someone else uses your personal information to file and collect a refund is something that has been increasing the past few years.

What are the best ways to avoid tax fraud?

From a government perspective, increased methods of detection are being implemented as returns are e-filed (for example, cross referencing where checks are being sent and red flagging if multiple refund checks are being sent to the same address), as well as penalties for being caught attempting identity-theft fraud. The State of Ohio is experimenting with an "Identification Quiz" that must be completed by some taxpayers before refund checks are issued.

For individuals, just like anything related to fraud, it is important to keep a close eye on all personal information that could be used (social security number, address, etc.) by thieves to steal your identity and file a refund return for you. One other thing to consider is if you know someone who usually doesn't consider filing (for example, doesn't make much money, might be unaware of filing requirements: students, elderly, etc.), always recommend they look into filing a return. Not only will this ensure that the IRS has a legitimate record/return filed by this person but there are also credits that individuals might be eligible for and could be missing out on by not filing.

What would you tell someone who is considering perpetrating a tax scam of their own -- whether it's minor (e.g. misstating their income) or more elaborate (e.g. stealing someone's refund)?

I wish I could claim that the odds are good that the IRS (or any government agency) will catch you but as budget cuts continue to hit such departments, the chances of being caught are not increasing that much, even through the implementation of other means of catching fraud are introduced. I could also try to appeal to integrity but the reputation of the IRS and Washington in general is not too high these days, so it's probably no good to say tell someone that they are just hurting themselves in the long run by increasing the cost of government.
Back to All Experts

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.
Back to All Experts

Philip Cary Christian

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

 

Previous Credit Card Fraud: What It Is & How To Prevent It   Bankruptcy Exemptions: What You Can Keep Next
DISCUSSION

Our content is intended for general educational purposes and should not be relied upon as the sole basis for managing your finances. Furthermore, the materials on this website do not constitute legal advice and should not be relied upon as such. If you have any legal questions, please consult an attorney. Please let us know if you have any questions or suggestions.