Tax fraud appears every year in several forms ranging from simple refund inflation scams to complex tax shelter deals. Simple awareness of tax fraud techniques, however, can help taxpayers safely navigate the realm of tax preparation and mitigate their chances of falling prey to scams.

The Internal Revenue Service (IRS) and other federal agencies monitor the ever-evolving world of tax fraud and have made strides in prosecuting offenders in recent years, but scammers find ways to adapt.

While new scams keeping pace with technology emerge from time to time, older time-tested tax-fraud schemes seek out new prey. Whatever tricks tax scams employ, they all have one thing in common: They can cause taxpayers financial harm and sometimes even legal trouble.

The epidemic of data breaches in recent years has made it more important than ever for taxpayers to remain vigilant. When companies fail to protect consumer data, the personal information of millions of customers can be bought and sold in the hidden expanses of the internet, making it easier for criminals to orchestrate tax scams.

Phishing: Phishing scams involve fake emails and websites that trick people into giving sensitive information. Hackers and identity thieves can then use that information to commit tax fraud or other crimes under other peoples’ names. Every year, for instance, the IRS advises taxpayers to be on the lookout for fake emails and websites designed to look like official IRS communications.

The IRS says that one unusual twist to a phishing scam it has seen this year has already victimized thousands of taxpayers. After stealing client data from tax professionals and filing fraudulent tax returns, the criminals use taxpayers’ real bank accounts to direct deposit refunds. The thieves then use various tactics to reclaim the refunds, such as falsely claiming to be from a collection agency or representing the IRS.

Phone Scams: Criminals have used the telephone to defraud taxpayers for years, though the approach and methods often change. Usually, scammers impersonate IRS agents with fake names and ID numbers and use aggressive tactics to get people to volunteer sensitive information. They threaten taxpayers with arrest, deportation, license revocation, and other things for non-cooperation.

Sometimes these scammers are sophisticated enough to “spoof” the IRS’ toll-free number so the call appears on caller ID as a legitimate call from the IRS.

Identity Theft: Taxpayers should be aware of tactics aimed at stealing their identities, not just during the tax filing season, but all year long, and take appropriate measures to protect themselves. The IRS, working with cyber security professionals, has made big improvements in reducing the number of taxpayers falling victim to identity thieves in recent years, but data breaches and other information leaks continue to result in fake tax returns being filed with someone else’s social security number.

Tax Preparer Fraud: While the vast majority of tax professionals provide honest, quality tax-preparation services, there are some preparers out there whose main intent is to defraud their clients. These scammers increase in number during the filing season and employ a variety of tactics to cheat taxpayers. For instance, fraudulent and dishonest tax preparers may simply enter the tax business for the ability to access the personal and financial information of others, which they can use for their own malicious intentions or sell to others.

Inflated Refunds: Fraudulent tax preparers may try to lure clients with promises of giant refunds, often targeting the elderly and low-income taxpayers who may be more eager to receive bigger refunds.

Fraudulent tax preparers often use a rate scale for their services that takes a percentage of the refund. To find victims, these fake tax preparers may use flyers, phony storefronts, or word of mouth via community groups where trust is high.

Excessive Claims for Credits: Fraudulent tax preparers may beef up deductions unrealistically to drive down the amount of tax owed with inflated business expenses, exaggerated mileage, charitable contributions, fictitious medical expenses, and other lies.

Taxpayers should keep in mind that they are legally responsible for what is on their tax return even if it is prepared by someone else, including a fraudulent tax preparer. The best way to avoid falling into a tax fraud trap is to choose a reputable tax professional.

Fake charities: Groups masquerading as charitable organizations solicit donations from unsuspecting contributors. These fake charities often pop up in the wake of natural disasters, preying on peoples’ impulses to help. These fake, fly-by-night charities offer the promise that all contributions are tax deductible.

If you’re uncertain about the legitimacy of a charitable organization, you can use the IRS’ Exempt Organizations Select Check—an online search tool that allows users to search for a tax-exempt organization and check certain information about its federal tax status and filings.

Abusive Tax Shelters: These complex scams are normally created to benefit wealthy individuals who fall into the highest tax brackets. These schemes usually involve setting up limited liability companies, limited liability partnerships, international business companies, or a number of other legitimate business structures, then using those structures to create false tax havens. Unsuspecting taxpayers may be lured into abusive tax shelters with the promise of eliminating or at least drastically reducing tax liabilities.

Remember, if the claims of a tax preparer sound too good to be true, they likely are. If you suspect someone is engaging in a tax-fraud scam, the IRS encourages you to report the activity.

Lance Gould, Beasley Allen Attorney
Lance Gould

Lance is working on cases related to whistleblower laws and Fair Labor Standards Act.

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