Every year, the IRS compiles a dirty dozen list of the worst tax scams, in order to help the American public avoid becoming victims. Some aren't applicable to most people, such as using offshore accounts to avoid paying taxes, but many are perpetrated by scam artists to victimize honest, hardworking taxpayers. With that in mind, here are four scams to watch out for in 2016, and some tips on how to avoid them.
IRS phone scams: Know what the IRS won't do
Every year, thousands of individuals are targeted for phone scams. Since October 2013, the IRS has received reports of nearly 900,000 contacts and over 5,000 phone-scam victims who have collectively paid more than $26.5 million.
Basically, tax-related phone scams typically involve a caller posing as an IRS agent. The caller may use an official-sounding IRS title or badge number, and the caller ID may even show "IRS" or something similar. Often, the caller will tell you that you owe the IRS money, and will try to threaten or trick you into paying -- maybe even by threatening arrest or loss of your driver's license. The "agent" will then demand immediate payment via a wire transfer or prepaid debit card.
In other variations of the scam, callers may tell you that you're entitled to a big tax refund you weren't aware of in order to steal your bank account or other personal identifying information.
The best way to identify and avoid phone scams is to be aware of what the IRS will never do. Specifically, the IRS will never:
- Call to demand immediate payment, or call at all about taxes owed without sending you a bill first.
- Demand payment without the opportunity to appeal or question the amount owed.
- Require a specific payment method. A legitimate IRS tax debt can be paid by check or through one of the IRS' payment processing partners.
- Ask for a credit or debit card number over the phone.
- Threaten to have you arrested for non-payment.
If you think a call is a scam, hang up the phone immediately. Report the scam to the IRS. If you think the call may be legitimate, or if you want to see if you actually owe taxes, call the IRS at 1-800-829-1040, and actual IRS employees can assist you.
Identity theft: Safeguard your information and file early
Identity theft has become a serious problem when it comes to tax returns. Scammers will use the identifying information of taxpayers to file phony tax returns with made-up income, deductions, and credit, and then pocket a hefty tax return.
Unfortunately, this is the one scam on this list that isn't 100% avoidable. In fact, many people don't even know they're a victim until they try to file their own taxes, only to find out that a return has already been submitted in their name.
In recent years, the IRS has stepped up efforts to catch and prevent fraudulent returns. In fact, in 2015 the IRS initiated 776 identity theft investigations, resulting in 774 convictions -- the average of which resulted in 38 months of jail time. Plus, the process of dealing with identity theft has improved in recent years. The IRS now provides assistance and a clear road map to resolving tax-related identity theft cases.
Even so, ID theft remains a big problem. The best way to avoid a fraudulent return is to file your taxes as early in the tax season as possible, and to safeguard your identifying information like your Social Security number and address.
Phishing scams: Know what to look for
Similar to phone scams, except using the Internet, phishing involves sending you a fake email or directing you to a fake website in an effort to steal your money or personal information.
Simply put, "The IRS won't send you an email about a tax bill or refund out of the blue," according to IRS Commissioner John Koskinen. In other words, if you get an unexpected email from the IRS, don't even click on it.
When it comes to websites, you should be aware that the official IRS website is www.irs.gov, and any legitimate IRS website will begin with that address. So, if a website begins with some other variation, such as "IRSgov.com" or anything similar, it's a fake.
Can you really trust your tax preparer?
Most tax preparers are honest service providers who will complete your return to the best of their ability, but there are some less-than-honest preparers as well.
There are several forms of tax return preparer fraud. Some encourage you to not claim some of your income, or to invent deductions and credits you're not really qualified for in order to inflate your tax refund. A dead giveaway here is preparers who charge a percentage of your refund -- stay away from those. Other fraudulent tax preparers are simply out to steal your personal information and/or pocket your tax refund.
With that in mind, here are a few ways to be sure your return preparer is legitimate, and to avoid becoming a victim:
- Ask for the preparer's IRS Preparer Tax Identification Number (PTIN). Paid return preparers are required to have one.
- Ask if they have any other credentials, such as being a Certified Public Accountant (CPA) or attorney.
- Ask about fees -- preparers are not allowed to base fees on a percentage of your refund. Avoid preparers who promise a bigger refund than the competition.
- Ask the preparer to e-file your return -- it's the safest and most accurate way to file.
- Legitimate preparers will ask to see your records and receipts.
- Never, ever sign a blank return.
- Review your tax return thoroughly before signing.
Scams will always exist, so read up on the latest
Unfortunately, as long as there are big sums of money involved, tax fraud will always exist. Therefore, it's important to keep up to date with the latest tax scams to avoid as things evolve. That way, you'll always be a step ahead of scam artists who want to steal your money and you'll have a lower chance of being victimized.