Tax Scams to Watch Out For

William J. Killory, CPA, Member (Feb, 2017)

Last year at this time we seemed to get daily phone calls from clients who had been contacted by the IRS demanding that they pay the “substantial money they owed” to the Government immediately or the police would come and arrest them.  There were several flaws in this particular scam, the first being that the IRS does not initially call anyone without sending you notices and other correspondence.  The IRS also will not send the police as they are fully capable of getting the money out of your account without showing up at your doorstep if really goes that far.  Another thing to take note of is the time it takes for your return call to be answered.  The scammers would give a return phone number and, I kiddingly say that, if the phone call was picked up immediately, then it was not the IRS as it takes forever to get through. Last October raids at call centers in India netted dozens of these scammers and thankfully, these “IRS” calls have dropped off the radar – for now.

It is estimated that tens of billions of dollars in phony refunds are issued each year by the IRS.  The advent of electronic filing allowed the Internal Revenue Code to process returns with tremendous speed, issue refunds within a week and unfortunately allowed scammers to file for phony refunds.  Everyone knows that you are supposed to receive your W-2’s and 1099’s by the end of January.  This year your employer is also required to transmit the W-2 by the end of January, one moth earlier than last year.  Even with the January deadline, scammers armed with a name and social security number can file in January before the information is processed. When the real taxpayer files, we will be notified that a return has already been filed disqualifying you from e-filing and holding up any refund that you may be anticipating.

Every year the IRS publishes their dirty dozen to let the public know what to be on the lookout for to avoid being scammed and what the scammers are looking for in case you want to outsmart them.

  1. Phishing.  This is a perennial concern and is not limited to tax schemes.  This is where criminals attempt to steal your financial information through email or bogus websites.  They will ask for personal information or try to get you to click on a link that will install spyware or other malware.  The IRS will not initiate contact via email and, from my experience, they avoid using emails that may contain sensitive information.  If you receive an unsolicited email form the IRS you can report it by forwarding it to phishing@irs.gov.
  2. Phone Scams.  As I mentioned earlier this has significantly abated after the arrests last fall.  If you do receive one of these calls, you can report this to the IRS at 1.800.829.1040.
  3. Identity Theft.  Just as this sounds, identity theft is where someone else has obtained your personal information and used it to file a tax return.  If you believe you may be a victim of identity theft you can contact the IRS at 1.800.908.4490 or visit the IRS special identity protection page on their website.  Taxpayers that have been victims in the past now will have additional identifying numbers that must go with their returns. The IRS is rolling out a test program that includes a verification code on W-2’s.  New York has implemented procedures where we must obtain driver license information in order to e-file.  This includes your license number, date of issue, date of expiration and the document number.  For those of us visually challenged it is a bit of an adventure to obtain the 10 character alpha-numeric document number that may be on the front or back of your license, depending on what type of license you have.
  4. Preparer Fraud.  Unscrupulous preparers will include improper deductions, credits and exemptions in order to boost the refunds that they may share with the taxpayers.  Remember that you are responsible for the completeness and accuracy of you return and anything that is too good to be true generally turns out to be not true.
  5. Fake Charities.  Watch out for groups masquerading as charities.  Bona fide charities (except churches) must comply with Section 501(c)(3) of the internal revenue code and file reports with the IRS.  Any charity that request social security numbers in order to give you a receipt for your contribution would be a good charity to avoid.
  6. Inflated Refund Claims.  When the IRS opened up the e-filing system this year, it instituted a delay in accepting returns with Earned Income Credits and Additional Child Tax Credits. This area has been widely abused by tax scammers.  We are required to obtain supporting documentation for our clients that file returns with these refundable credits.
  7. Excessive Claims for Business Credits.  The IRS has identified fuel tax credits and research credits as an area that they will be looking at for possible abuse.  If you are entitled to them and you have support for a credit then take them, but just be aware that the IRS has flagged them for additional scrutiny.
  8. Falsely Padding Deductions on Returns.  Overstating charitable deductions or employee business expenses is another area that the IRS is looking at.  There are strict contemporaneous documentation requirements that go with both of these deductions so make sure you have proper backup before claiming them.
  9. Falsifying Income to Claims Credits.  At first impression this is a rather odd item, claiming more income than you earned.  In order to get Earned Income Credit you need earned income.  People claiming a nominal amount of self-employment income or taxpayers with eligible children can obtain a significant refund even though they did not make any tax payments. 
  10. Abusive Tax Shelters.  The use of trusts, multiple pass-through entities and offshore accounts to avoid tracing assets and the related income is rarely a good idea.  The line between tax avoidance (legal) and tax evasion (illegal) can be grey, but if someone is promising you that you can legally avoid tax through these schemes I would approach that with a healthy dose of skepticism.
  11. Frivolous Tax Arguments.  Every year around this time there is usually a story about someone being indicted for filing a tax return and refusing to pay on some religious, moral or constitutional grounds that only they comprehend.  The 16th Amendment enacted in 1913 put to rest any constitutional argument and will tack on a $5,000 penalty on top of any other criminal or civil penalty the IRS can invoke.
  12. Offshore Tax Avoidance.  It is not illegal to have investments overseas, use the Cayman Islands or a Swiss bank account as long as the income is properly reported on your tax return.  We have discussed in past article the need for reporting foreign bank and financial accounts (FBAR) and the substantial penalties for not reporting.  If you have not included foreign accounts on your return, the Offshore Voluntary Disclosure Program is available to mitigate some of the more onerous results of noncompliance.

The filing season does not seem to get any easier year after year.  It seems that each taxing authority asks for more and more information every year.  Some of it is to protect you from being on the wrong end of identity theft.  Some of it is reasonable and some of it is a bit uncertain, but either the State or the IRS is requiring all of it.  The sooner you have your information into your tax professional at Dermody, Burke & Brown, the sooner we can identify what may be missing and get it into the system and back to you for filing.  If you have any questions or concerns regarding tax scams, please do not hesitate to contact your tax advisor.

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