Tax Scams to Watch Out For in 2018

Christian C. Samara, CPA (Feb, 2018)

It is everyone's favorite time of year again, tax filing season. You gather up your tax documents, send them to your trusted tax professional, and wait for confirmation that your tax return has been filed. Then, you notice a refund in your bank account that does not seem right. Someone claiming to be an IRS representative leaves a message saying your refund was erroneous, demanding you return the refund to them.

Unfortunately, if this sounds familiar, you have been the target of a tax scam. This is a new version of an old scam. Tax scammers use phishing techniques to steal taxpayers' real bank account information, file fraudulent returns, and have the refund deposited into a taxpayer's actual bank account. Then, posing as the IRS or a collection agency, they call demanding the money be returned. Unlike previous versions of phone scams, many taxpayers have fallen victim to this new version because they can see the erroneous refund that has been deposited into their account.

If you believe you have been targeted by this tax scam with an erroneous refund deposited into your bank account, do not follow the return instructions left via phone call or email. The IRS is asking taxpayers to contact the Automated Clearing House (ACH) department of the bank/financial institution where the direct deposit was received, and have them return the refund to the IRS.  A phone call will then be placed to the IRS at 1-800-829-1040 (for individuals) or 1-800-829-4933 (for businesses) to explain why the direct deposit was returned.

Tax scammers are always brainstorming new ways to steal taxpayers' information. The IRS warns of recent phishing schemes targeting human resource and payroll professionals. Scammers pose as a CEO or other corporate executive sending an email to either a company's human resource or payroll department.  They ask for an updated employee list with personal details, or a specific employee's W-2, using the information to file fraudulent tax returns. Thanks to the advent of electronic filing, tax returns can be processed faster than ever before, with refunds sometimes being issued within a week. This means it is more important than ever to safeguard a taxpayer's sensitive information. Once a scammer gets their hands on it they can move to file a fraudulent return immediately, disqualifying the taxpayer from filing their actual return, and holding up any refund they were anticipating.

Every year the IRS publishes their "dirty dozen" tax scam list to let the public know what they should be on the lookout for, and how to help recognize as well as avoid falling prey to a scam.  This year the following scams made their list.

Phishing: Phishing scams are when scammers use fake e-mails or websites looking to steal personal information. It is important to remember that the IRS will never initiate contact with taxpayers via e-mail about a bill or refund. Never click on one claiming to be from the IRS.

Phone Scams: Ongoing threats to taxpayers are phone scams from criminals pretending to be IRS agents. The IRS has seen a surge of these phone scams in recent years with con artists threatening taxpayers with police arrest, deportation, and license revocation, among other things. If you receive one of these calls you should report it to the IRS at 1-800-829-1040.

Identity Theft: While always a threat, taxpayers need to watch out for identity theft, especially around tax time. The IRS continues to aggressively pursue criminals that file fraudulent returns using someone else’s Social Security number.

Return Preparer Fraud: While the vast majority of tax professionals provide honest, high-quality service, there are some dishonest preparers who set up shop each filing season to perpetrate refund fraud, identity theft, and other scams that hurt taxpayers.  This is usually done by taking improper deductions or credits to boost refunds. It is important to remember that as the taxpayer, you are ultimately responsible for the completeness and accuracy of your own return.

Fake Charities: Taxpayers should be wary of groups pretending to be charities. Taxpayers should take a few extra minutes to ensure their hard-earned money goes to legitimate and currently eligible charities. IRS.gov has the tools taxpayers need to verify the status of a charitable organization. As a rule of thumb, any charity that requests a social security number in order to get a receipt is probably a good charity to avoid.

Inflated Refund Claims: Taxpayers should be on the lookout for anyone promising inflated refunds. Be wary of anyone who promises a big refund before looking at your records, or charges fees based on a percentage of the refund. Taxpayers should also not agree to sign a blank return. The IRS warns that scammers often use flyers, advertisements, phony storefronts, and word of mouth via community groups where trust is high to find victims.

Excessive Claims for Business Credits: Avoid improperly claiming the fuel tax credit, a tax benefit generally not available to most taxpayers. The credit is usually limited to off-highway business use, including usage in the farming industry. Taxpayers should also avoid misuse of the research credit. Improper claims often involve failures to participate in or substantiate qualified research activities, and/or satisfy the requirements related to qualified research expenses.

Falsely Padding Deductions on Returns: Taxpayers should avoid the temptation to falsely inflate deductions or expenses on their returns to pay less tax, or potentially receive larger refunds. Think twice before overstating deductions such as charitable contributions and business expenses, or improperly claiming credits such as the Earned Income Tax Credit or Child Tax Credit.

Falsifying Income to Claim Credits: Taxpayers should not invent income to erroneously qualify for tax credits, such as the Earned Income Tax Credit. Taxpayers are sometimes talked into doing this by con artists. Taxpayers should file the most accurate return possible because they are legally responsible for what is on their return.  

Abusive Tax Shelters: The IRS is committed to stopping complex tax avoidance schemes, as well as the people who create and sell them. The vast majority of taxpayers pay their fair share of tax, and everyone should be on the lookout for people peddling tax shelters that sound too good to be true. When in doubt, taxpayers should seek an independent opinion regarding complex products being offered.

Frivolous Tax Arguments: Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims even though they have been repeatedly thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or disregard their responsibility to pay taxes. The penalty for filing a frivolous tax return is $5,000.

Offshore Tax Avoidance: It is not illegal to have overseas investments, as long as the income is properly reported on your tax return. If you have not included foreign accounts on your return, the Offshore Voluntary Disclosure Program is available to help mitigate some of the more burdensome results of noncompliance which can result in substantial penalties.

In recent years the IRS and state governments have increased their efforts to combat tax scammers through increased awareness campaigns, as well as requiring more information to file tax returns. This has not stopped scammers from trying their hardest to obtain taxpayer's information and file fraudulent tax returns. It is more important than ever to be aware of the tax scams out there, taking all the necessary precautions keeping your personal information safe. If you have any questions or concerns about tax scams, please do not hesitate to contact a trusted Dermody, Burke and Brown tax advisor.

 

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.

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