Every year, the IRS releases its “Dirty Dozen,” revealing the top 12 tax scams for the year. Being aware of the top scams can help you protect yourself and ensure that you don’t accidentally take part in any fraudulent activity. Are you looking to stay safe this tax season? Here’s a summary of the main tax scams you should avoid.
Phishing is, sadly, a very common tax scam. It occurs when someone uses communication channels (e.g., emails, text messages, social media messages, and websites) to try and retrieve information from a target. Some criminals even impersonate the IRS to try to steal personal information. These attempts surge during tax season.
How can you stay safe? Just remember that IRS does not initiate contact with taxpayers about a tax refund or bill through these channels — only via snail mail. If you receive a message “from the IRS” via these channels, do not click and do not respond.
2. Phone scams (“vishing”)
Criminals also impersonate IRS agents over the phone. If you pick up, they’ll demand payments or personal information. Worse, they’ll sometimes threaten their victims with deportation, license revocation, police arrest, and more. Like phishing scams, the rate of these calls rises during tax season.
Tactics vary. You may receive a robocall with instructions to call back at a certain number. Or you may hear from an actual person claiming to be an official IRS representative. Some have unlisted numbers, while others can fake out the caller ID so that the call appears to come from the IRS. Some even have fake employee titles and badge numbers.
If you receive such a phone call, remember that the IRS will never demand immediate payment over the phone. If you owe money to the IRS, it will notify you in a dozen ways before picking up the phone. And it certainly won’t threaten to bring in law enforcement immediately. You’ll always be given a chance to question the allegation and appeal the amounts owed. If a caller denies you these options, they’re likely a scammer.
3. Identity theft
Next, criminals attempt to claim other taxpayers’ refunds by filing fraudulent tax returns using someone else’s social security number or individual taxpayer identification numbers (ITIN). You can protect yourself from identity theft by:
- Having up-to-date security software with antivirus and firewall protections.
- Using strong passwords.
- Encrypting sensitive files on your computer.
- Being on-guard for phishing attempts.
- Not carrying around your social security card with you.
Also, be sure to file your tax return on time.
4. Return preparer fraud
Unfortunately, some tax preparation professionals are dishonest. Instead of (or in addition to) helping you to prepare your taxes, they squirrel away your personal information and steal your identity.
If you’re hiring a tax preparer, read unbiased reviews from past customers to make sure that their practice is on the up-and-up.
5. Inflated refund claims
Some preparers promise to provide inflated tax refunds. For example, they may ask you to sign blank returns, guaranteeing a big refund before even looking at your records. If you hear this kind of language from a tax preparer, back off. Also, if a preparer’s fee is based on a percentage of your tax refund, that’s another red flag.
Fraudsters use flyers, fake storefronts, and word-of-mouth through community groups to connect with their victims. While an inflated refund can seem attractive, it’s better to find a legitimate preparer who you can trust.
6. Falsifying income to claim credits
Some criminals will try to convince you to falsify income on your tax return. Why? So that you can qualify for tax credits that you wouldn’t otherwise get, like the Earned Income Tax Credit. But steer clear of these fraudulent tactics. If you get caught committing this tax scam, you’ll incur severe penalties and criminal prosecution.
7. Falsely padding deductions on returns
Another common tax scam is the inflation of expenses or deductions on tax returns to reduce the amount owed or to increase a tax refund. Common false claims include overstated medical expenses, business expenses, and charitable contributions. If you’re caught, significant penalties can apply, as well as criminal prosecution.
8. Fake charities
This tax scam stems from groups that pretend to be charitable organizations. They use the prospect of tax deductions to lure in donors. But when tax season rolls around, those donors can’t deduct their donations, because the organization is not a real non-profit.
To reduce the chances of becoming a victim, don’t give your personal information to anyone who solicits a donation. Further, be wary of charities with names similar to well-known, nationwide organizations. You can search for verified tax-exempt organizations using this tool from the IRS.
9. Excessive claims for business credits
Some businesses inflate their deductions to lower their tax liability. For example, a fraudulent company might improperly claim the fuel tax credit or the research credit. To avoid legal consequences, make sure that all of your business’ claims are genuine.
The latest report by the IRS warns that many businesses are abusing the research and experimentation credit. The abuse generally involves failure to participate in, or substantiate, qualified research activities and/or satisfy the requirements related to qualified research expenses.
“To claim a research credit, taxpayers must evaluate and appropriately document their research activities over a period of time to establish the amount of qualified research expenses paid for each qualified research activity. Taxpayers should carefully review reports or studies to ensure they accurately reflect the taxpayer’s activities.”
10. Offshore tax avoidance
Another common type of tax fraud occurs when taxpayers try to hide money and income offshore. Every year, the IRS conducts thousands of offshore civil audits, which result in the payment of tens of millions of dollars in unpaid taxes. And the criminal charges that follow lead to billions of dollars owed in criminal fines and restitution.
If you may be in this situation, talk to a tax lawyer. You may need to come forward and accurately report any offshore income or investments by using Form 8938 to report foreign assets.
11. Frivolous tax arguments
Taxpayers are also warned against using outlandish or frivolous arguments to avoid paying taxes.
For example, taxpayers may claim that only foreign-source income is taxable, or that the First Amendment allows them the right to refuse to pay taxes on moral or religious grounds. In court, these claims are consistently dismissed as frivolous and thrown out.
And making frivolous claims is not just a waste of time — it’s also costly. The penalty for filing a frivolous tax return is $5,000. That fee can also apply to other frivolous submissions, such as an outlandish request for an installment agreement or taxpayer assistance order.
12. Abusive tax shelters
Lastly, some scammers create complex tax avoidance schemes, such as syndicated conservation easements and trusts, to avoid paying taxes. You may encounter preparers, strategists, or consultants offering these products.
Careful with “gray areas”
In some cases, there are gray areas where the IRS is still determining whether it’s tax mitigation or tax avoidance. For example, the IRS reported that: “some U.S. citizens and residents are relying on an interpretation of the U.S.-Malta Income Tax Treaty (Treaty) to take the position that they may contribute appreciated property tax-free to certain Maltese pension plans and that there are also no tax consequences when the plan sells the assets and distributes proceeds to the U.S. taxpayer.”Ordinarily, the gain would be recognized upon disposition of the plan’s assets and distributions of the proceeds. The IRS is evaluating the issue to determine the validity of these arrangements and whether Treaty benefits should be available in such instances and may challenge the associated tax treatment.
To avoid these tax scams, listen to your intuition. If an offering seems too good to be true, it probably is.
13. Improper monetized installment plans
Let’s make this a baker’s dozen. The IRS is now targeting promoters that provide fraudulent installment plans to defer the payment of taxes on appreciated property.
These transactions occur when an intermediary buys appreciated property from a seller in exchange for an installment note, which typically provides for payments of interest only, with principal being paid at the end of the term. The IRS explains that “in these arrangements, the seller gets the lion’s share of the proceeds but improperly delays the gain recognition on the appreciated property until the final payment on the installment note, often slated for many years later.”
“We are stepping up our enforcement against abusive arrangements,” said IRS Commissioner Chuck Rettig. “Don’t be lulled into these shady deals. The IRS recommends that anyone who participated in one of these abusive arrangements should consult independent counsel about coming into compliance.”
Sidestep tax scams with tax preparers you can trust
Now that you know what to watch out for, you can protect yourself from tax scams. As a taxpayer, it’s essential to file your taxes honestly and accurately. It’s also important to beware of unscrupulous tax preparers and steer clear of tax scams. If you need help finding a tax prep company you can trust, review our list of vetted professionals below! If you are struggling with tax debt, consider how tax relief can help you reduce your tax liability.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.