Tax Scams to Avoid
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 two tax-prep giants in trouble with the law. A few years ago, H&R Block found itself staring down the business end of a class action lawsuit for neglecting to reveal e-filing, loan document preparation, and administrative fees that could triple the cost of a customer's loan. Similarly, Jackson Hewitt recently agreed to pay $4 million in consumer restitution for similar abuses. (FYI: Both companies still peddle these products, though probably with more frank fee disclosure.)
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.
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.
For more tips on your taxes, learn about:
- How to cut your taxes in 60 seconds.
- What tax bracket you're in.
- Why your tax refund is a ripoff.
- How to survive an IRS audit.
Dayana Yochim honed her street smarts on the mean streets of her childhood stomping grounds in Lawrence, Kan.