It can be hard enough to hand over some of your hard-earned dollars to Uncle Sam each year in taxes, but it's even more painful if you fall for a tax scam and end up enriching some crooks. Learn more about common tax scams so that you can recognize -- and avoid! -- them.
Within a month or two, our friends at the IRS will likely be releasing their latest list of top tax scams. Many are likely to be holdovers from their 2016 "Dirty Dozen" list of scams. Here's a review of those scams -- any of which could cost you in 2017 if you're not careful.
1. Identity theft
Identity theft is a problem even in the world of taxes. It happens when a criminal impersonates you (using your Social Security number, for example), filing a tax return in your name and collecting a refund. The IRS has been tackling this problem, and in fiscal year 2015, it initiated 776 identity theft related investigations, resulting in 774 sentencings. It has been working behind the scenes, and in the first nine months of 2016, it reduced the number of people who filed affidavits with the IRS saying they were victims of identity theft by almost half, compared to 2015 -- with affadavits dropping from 512,278 to 237,750.
2. Phone scams
It's very important to know that the IRS is never going to call you out of the blue, demanding that you make a payment immediately. It's not going to call and ask for your credit card numbers or bank account information. If you receive an alarming or threatening call, just hang up.
The word "phishing" was added to the Oxford English Dictionary more than a decade ago. It's a common scam inside and outside the tax world, whereby you receive a phony email or end up at a phony website that looks legitimate -- perhaps purporting to be from your bank or a major retailer or other company you trust -- asking you for personal information. There are emails that look like they're from the IRS, requesting personal information from you, such as your credit card number, password, or perhaps your Social Security number. Be on your guard and don't offer personal information unless you're very sure who you're giving it to.
4. Tax return preparer fraud
All tax preparers are not created equal. Some are very skilled, while others are less so. Most are honest, while a few are... con artists. It's an appealing scam, as they can have your trust quickly, receiving lots of personal information from you, such as Social Security number, bank statements, and so on. They can use the information you give them to file a return for you and pocket your refund. The IRS offers tips to help you settle on a legitimate preparer, such as asking for their IRS Preparer Tax Identification Number, as all preparers need to be registered with the IRS.
5. Offshore tax avoidance
If you think it's legal to hide money and income overseas, thereby avoiding being taxed on it, think again. This has been a big problem, leading the IRS to set up the Offshore Voluntary Disclosure Program (OVDP), which helps taxpayers come clean. The IRS has noted:
Since the first [OVDP] opened in 2009, there have been more than 54,000 disclosures and we have collected more than $8 billion from this initiative alone. The IRS conducted thousands of offshore-related civil audits that have produced tens of millions of dollars. The IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.
6. Promises of big refunds
If an alleged tax service seems to be promising to get you a big tax refund, beware. The scam will often involve your signing a blank return and promising to fork over a percentage of your fat refund. This scam shouldn't even make sense as no one can know what your tax bill will be until all your numbers have been crunched. These scams are often advertised via flyers and mailings -- even fake storefronts -- centered around trusted entities such as churches or community centers.
7. Fake charities
Another trap for unsuspecting taxpayers is the fake charity. You might have heard of a legitimate charity and might be willing to support it. Then you receive a phone call supposedly from the charity, asking you to make a donation via credit card or through your bank account. If you get such a call, hang up and, if you want, look up the charity's website or phone number on your own and donate via that. Similarly, don't fall for alleged charities that have names very similar to ones you know and respect. "Doctors Outside Borders," for example, is not the Nobel-Prize-winning Doctors Without Borders organization. You can research charities at sites such as GuideStar, CharityNavigator, GiveWell, and CharityWatch.
8. Inflated deductions
This scam is often perpetrated not by full-time con artists, but by ordinary tax-payers -- and it's a scam against the IRS and fellow taxpayers. It happens if you exaggerate deductions or make up false ones, such as claiming to have given more to charity than you did or claiming more business expenses than you actually incurred. The rest of the scams are generally taxpayer-driven ones -- or ones suggested by or covertly used by shady tax preparers.
9. Excessive business credit claims
Some taxpayers overreach in claiming tax credits related to business, such as the fuel tax credit that's typically for off-highway business use (such as farming). The credit available for research is misused when a taxpayer doesn't qualify for it or can't substantiate the research. The IRS would like you to know that there's a $5,000 fine for those who file a "frivolous" tax claim.
10. Claiming tax credits fraudulently
Claiming tax credits you're not eligible for is another no-no. One way taxpayers do so is by inflating their income to qualify for or receive more of certain credits. This is often in connection with "refundable credits" such as the Earned Income Tax Credit, which has certain earned income requirement.
11. Abusive tax shelters
If any tax service provider suggests that you use tax-avoiding shelters, be wary. Last year, IRS Commissioner John Koskinen warned that, "Taxpayers should steer clear of unscrupulous promoters who sell phony tax shelters with no real purpose other than to avoid paying what is owed," adding that, "These schemes can end up costing taxpayers more in back taxes, penalties and interest than they saved in the first place." These illicit practices include taking advantage of financial secrecy protections in other countries and setting up credit cards with offshore financial institutions to sidestep the IRS. The IRS suggests that if you're tempted by such suggestions, you get a second opinion.
12. Frivolous arguments
Finally, keep in mind that the IRS won't be amused if you try to get out of your tax obligations by claiming that you don't really owe money because of some argument you read about or heard about. Trust that the IRS has likely heard it many times before -- and has gone to court and won, too, with such arguments dismissed. Taxpayers do have the right to question honestly, but if you're found to be filing a "frivolous" return, you may face a $5,000 penalty.
The IRS is not out to get you and the chance that your tax return will be flagged for an audit is low. (Less than 1% of tax returns are audited.) Still, you can avoid a lot of trouble and cost by playing by the rules -- and by not falling for it when others try to scam you.