Don't Get Scammed on Your Tax Refund

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Itching to get your due from Uncle Sam? There are plenty of folks -- legit and otherwise -- who will happily promise to help you get a faster or bigger refund. My advice? Don't fall for any of the come-ons, no matter how tempting they sound.

The best-case scenario: You'll pay triple-digit interest rates to borrow your own money for a few weeks. Worst-case: You'll share a jail cell with the con who promised to sweet-talk the IRS on your behalf.

Loathsome but legal
The most common tax-time pitch is the "instant refund," which gives you access to your refund money to tide you over until the IRS sends the official check. Millions of taxpayers get short-term refund anticipation loans (RALs) every year, according to the Consumer Federation of America and the National Consumer Law Center.

Although RALs are offered by legitimate businesses, the loan terms rival those of the neighborhood loan shark. Small fees ($30 here, $59 there) add up. On a typical refund of $2,000, forking over $100 to cover loan costs means you're paying 5% interest just to get your money a single week earlier. That makes your effective APR around 260%. (No, that's not a typo.) Add in administrative fees and you're looking at an APR of more than 400%. (Again, not a typo.)

The hidden fees and misleading marketing of RALs have gotten tax-prep companies in trouble with the law. Big settlements haven't dissuaded most of them from continuing to peddle these products, though, even if they have to be more frank about the fees involved.

Need speed?
If you really can't wait for your refund check, consider e-filing your tax return. (The average fee for electronic filing is $23, according to the National Society of Accountants.) It's interest-free and fast -- boasting a turnaround time of one or two weeks if you get your refund by direct deposit.

Scams, shenanigans, frauds, and fiends
Don't put your guard down after you dodge the RAL rigmarole. The cons are out in full force, too. Typical ploys falsely promise to reduce or altogether eliminate your tax bill. (See also: "I've got some valuable swamp land in Florida I'm willing to part with for a song.") The "zero wages" and the mysterious "form 843 tax abatement" schemes, for example, encourage filers to falsify information on legitimate IRS forms in the hopes that a blizzard of paperwork will distract the Feds.

Other scams encourage taxpayers to illegally hide income in an offshore bank or brokerage or move money into a tax-exempt supporting organization or a donor-advised fund while still maintaining control over the money. (Both no-nos.)

Also beware of phishing scams in which ne'er-do-wells pose as IRS agents or other legitimate financial institutions (notifying filers of an audit or outstanding refund) to get taxpayers to reveal personal financial information. Click "delete" ASAP. The IRS doesn't email. Anyone. Ever.

If headaches, fines, prison, and steep penalties are your idea of fun, then go ahead and sign on the shady dotted line. If you do fall prey to any of these scams or suspect tax fraud, report it to the IRS. Here are some tips on staying on the right side of the law with Uncle Sam.

Mailbox mayhem
And finally, this entry comes from the "just because you're paranoid doesn't mean they're not after you" file. Christmas for fraudsters starts in January. That's when information-rich tax-related documents begin to snake through the postal system. According to CNET, about 8% of identity theft cases are linked to mailbox breaches.

Keep a watch on lock-pickers by keeping a running list of everyone who pays you -- employer, banks, brokerages, etc. (Here's a simple way to organize your tax paperwork.) Check off the names as soon as you receive a copy of what they filed to the IRS. Track down docs that are missing by mid-February by contacting the original source. That way, you should be able to avoid the scammers before they get you.

Learn more about how to reduce your tax bill at the Motley Fool's tax center.

For more tax Foolishness:

This article, written by Dayana Yochim, is adapted from an article included in the Motley Fool's tax center collection. It has been updated by Dan Caplinger. The Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1085325, ~/Articles/ArticleHandler.aspx, 5/24/2016 10:20:24 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 17,680.33 187.40 1.07%
S&P 500 2,068.87 20.83 1.02%
NASD 4,822.83 57.05 1.20%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes