Avoiding Tax Scams

Many individuals feel confident that they would never fall victim to a tax-related scam. However, stories over recent years are showing that sophisticated scams continue to surprise many people, both in their ingenuity and success in yielding significant sums of money and personal information for the scammers.

The IRS is constantly working to assist taxpayers in increasing awareness, including its annual release of the “Dirty Dozen” list. Fraud and deception, which target taxpayers, seem only to be escalating. How can you protect yourself from scams such as telephone calls, emails, fraudulent preparers, or even fictitious charities? Understanding the current landscape and being cognizant of certain key points can help protect you from falling prey to continuously evolving tax scams.

The Telephone Call/Email

Oftentimes, a scammer will call or email a potential victim to “inform” the taxpayer that he is due a large refund or, unfortunately, owes money to the IRS. Calls may appear to be from the IRS on caller ID, and emails may appear to be from an authentic government website such as USA.gov or a variant of IRS.gov. This may lead people to believe that the call or email is legitimate. A taxpayer who is due a large refund will wish to get his money as quickly as possible, and the scammer will often use this to lead the taxpayer towards divulging information to receive a direct money transfer/wire transfer. In the case where the caller says the taxpayer owes money to the IRS, the caller may use threats of immediate arrest, jail time, potential audit, or a wage or bank levy to coerce the taxpayer to divulge information to make an immediate payment from their bank account or credit card. In either case, the scammer’s goal is to get the victim’s money and vanish. The IRS consistently explains why no one should accept these calls or emails, or respond in to such calls or solicitations.

In order to avoid potential traps, know that the IRS:

The IRS recommends that if you think you owe taxes or are not sure, call the IRS hotline, (800) 829-1040. IRS employees will assist you with your account.

Taxpayers wishing to report these incidents can contact the IRS or the Treasury Inspector General for Tax Administration (visit IRS.gov or TIGTA.gov).

The Fraudulent Tax Preparer

When choosing a tax preparer, focus on the proficiency of the professional rather than on cost. The true cost of working with a preparer not well suited to your situation may ultimately exceed any fees you may pay. Many taxpayers may feel they are not informed enough to choose a qualified preparer. If the preparer you choose to work with is known for advertising knowledge of hidden credits, unused tax loopholes, or inflating deductions which will lead to larger refunds, be wary. Taxpayers are ultimately responsible for ensuring that all income is properly reported on their returns, and for credits, deductions, and other tax positions taken to justify lower taxes or a large refund.

Additionally, some professionals may put their clients at risk through the use of abusive tax structures, or complex trust arrangements that promise to eliminate or substantially reduce tax liabilities. While there are legitimate reasons for certain tax structures and trust arrangements, those that are used improperly expose taxpayers to significant risks, from tax, penalties, and interest, to criminal prosecution.

So, how can you choose a professional who can help you in tax planning, structuring, and compliance, while complying with IRS rules yet take advantage of all the tax benefits to which you are entitled? CPAs are state-licensed and are held to a high professional standard. Each state lists CPAs on its website. You can look up your CPA’s license status to see if it is active, suspended, expired, or reflects any disciplinary actions.

If your CPA or tax professional is affiliated with a firm, you can research the firm online, with the Better Business Bureau or state CPA website, and inquire of others in your community for recommendations. You can also ask a prospective preparer or firm to provide recommendations from existing clients with similar situations to yours. Your goal is to find a professional that can advise you now and for the future, and will also be there to help should a tax return be questioned or subjected to audit.

The Fake Charity

With so many worthy charitable causes, global natural disasters, and legitimate relief efforts, the efforts of those pushing fraudulent charities is evolving and increasing. When you want to give to a charitable cause, or provide financial help to a charity in a real-time disaster relief effort, the last thing you want is for your money to not get where you want it to go, and for the IRS to deny your deduction.

How do you verify a charitable organization and make sure you validate your deduction for tax purposes?

A scam charity often has a website which appears authentic, with a name that may be nearly identical to a legitimate organization. The IRS allows you to look up a charity using its Exempt Organizations Select Check Tool on the IRS.gov website. This tool allows you to find out if the organization you are contributing to is a qualified exempt organization eligible to receive tax-deductible charitable contributions. Taxpayers can rely on this continually updated IRS list when making contributions to confirm tax deductibility.

Scam charities may also solicit information from you that is outside the scope of a legitimate charitable request, such as your date of birth, social security number, bank account number, or passwords. Do not provide this information to anyone soliciting a contribution from you.

Do not use cash for charitable contributions. Make contributions via check or credit card for your security and as documentation for your tax records.