You're reading


How to Avoid Tax Scams


How to Avoid Tax Scams

The IRS Zeroes In On Tax Fraud

by Carol Wise

Every year, the IRS publishes a list of the “Dirty Dozen” tax scams that pose the most danger to taxpayers at large. If you fall prey to one of these scams, you are at risk for owing the IRS a large sum of money. In extreme cases, a tax scam can even result in criminal prosecution.

It’s important to protect yourself from tax fraud by knowing the hazards. This article explains some of the most common tax scams identified by the IRS.

READ: An IRS Warning About Phone Scams

Fraudulent Tax Preparers Promising Large Refunds

This is a prolific scam, which involves baiting victims by promising them large tax refunds.

For example, a person posing as a tax preparer will claim to have special knowledge about tax credits or rebates. Often times these fraudsters prey on elderly, low-income, or non-native taxpayers. They seek to gain the taxpayer’s trust via word-of-mouth or ad fliers, which may be distributed at a church or club. The scammer will then file a false tax return in the victim’s name and have the refund deposited into their own account, deducting a huge fee for their “services” before turning the difference over to the taxpayer. In many cases, the scammer will keep the entire tax refund.

The IRS emphasizes that taxpayers are legally responsible for what appears on their tax returns (whether or not it was prepared by someone else), and they may incur penalties for filing false claims or receiving fraudulent tax refunds. The penalty for deliberately doing this can range up to $5,000.

You can protect yourself against this type of fraud by making sure you are using a qualified tax return preparer. An honest tax preparer will ask for proof of your eligibility for tax credits, and they will always give you a copy of your prepared return. As the preparer, they will also sign your return and enter their IRS Preparer Tax Identification Number (PTIN).

READ: Tax Preparation Tips

Claiming False Income, Expenses, or Exemptions

With this type of tax refund fraud, the scammer’s goal is to create an inflated refund. This is accomplished by reporting income that was never earned or expenses that were never paid, in order to gain large refundable credits.

Participating in this type of scam can result in severe repercussions, including repayment of the faulty refund (with interest and penalties) and possibly criminal prosecution. In particular, the IRS watches for abuses in connection with the Fuel Tax Credit, which can bear a fine of up to $5,000.

READ: Woman Arrested for Faking $3 Million Income for Giant Tax Refund

Stashing Income Offshore

While you are permitted to maintain a financial account in another country, you are still required to report the funds to the U.S. government. Failure to report foreign accounts is considered a form of tax evasion. This type of fraud includes hiding income in offshore banks, brokerage accounts, nominee entities, foreign trusts, employee-leasing schemes, private annuities, or insurance plans. U.S. taxpayers with undeclared accounts may risk fines, penalties, and even criminal prosecution.

The IRS actively investigates and pursues taxpayers with unreported accounts, and works with the Department of Justice to prosecute them. Storing income in this manner will become even more difficult as new reporting requirements for foreign accounts are phased in. The IRS maintains an Offshore Voluntary Disclosure Program (OVDP) to provide taxpayers an opportunity to comply with these obligations.

READ: 5 Tips for People Who Owe Taxes

Impersonating a Charity

These types of scammers typically emerge in the wake of any natural disaster. Their targets can include people seeking to make donation contributions, as well as victims of the disaster. In some cases, false websites or mailings are created to solicit donations, which are then pocketed by the scammer. In other cases, a scammer will offer to fill out insurance claim forms or tax forms for the disaster victims, with the intention of stealing their personal information.

You are advised to avoid “donating” your personal information along with any contribution. For your own protection, you should only donate to qualified charitable organizations — and beware of organizations with names that are similar to established charities. You can identify legitimate, tax-exempt organizations by using the IRS’ Exempt Organizations Select Check online tool (known as “EO Select Check”).

READ: Tax Breaks for Charity Work

Frivolous Tax Arguments

Every year, a certain number of people assert that the income tax is unconstitutional and thus claim they are not obligated to pay any taxes. You should be wary of scammers who promote these claims. They may falsely advise unsuspecting taxpayers that the 16th Amendment (enacting the Federal income tax in 1913) was not properly ratified by the requisite majority of states and is therefore invalid, or offer some similar type argument. This and a number of other frivolous tax arguments have been uniformly dismissed by the courts and invite criminal prosecution. It is considered a felony to promote frivolous arguments or to assist taxpayers in claiming tax benefits based on frivolous arguments.

Visit the website for a complete list of the Dirty Dozen tax scams.

READ: Tax Horror Stories That Will Give You Nightmares