Posted by: John S Kiernan

Tax season can be a costly, confusing time of year, with Uncle Sam expecting an on-time tribute and all sorts of schemers angling to steal refunds. The history of tax fraud is just as long as that of taxes, you see.

But no one wants to deal with the monetary loss, credit-score damage or hassle that can accompany tax scams. So it’s important to have at least a basic understanding of what the most common types of tax fraud are as well as how to thwart them. You can find that information below.

1. Tax Scams and Fraud
2. Tips for Consumers
3. Ask The Experts

Tax Scams and Fraud

• Fraudulent Returns (Identity Theft): With a few key pieces of personal information – such as someone’s name, Social Security number and/or address – scammers can file a fraudulent tax return and ultimately pocket the victim’s refund, if any. It’s a serious problem, resulting in the IRS paying out roughly $11.1 billion from 2013 to 2015.

  So don’t ignore the warning signs: a letter from the IRS about multiple returns or a failed e-file attempt, in particular. That last one bears repeating: If you try to file online and are unable to do so, that could indicate a fraudster has already filed a return under your name.

  “The idea of someone else doing your taxes might seem pretty appealing in normal circumstances. In fact, it’s something you’d typically have to pay for,” said WalletHub CEO Odysseas Papadimitriou. “That’s definitely not the case when it comes to fraudulent tax returns. Not only could this type of redundant filing mess with your refund, but it will also likely trigger an inconvenient investigation by the IRS.”

  With that said, the best ways to prevent a fraudster from filing under your name are:

  • File as early as possible every year, even if you don’t expect to owe any taxes or receive a refund.
  • Take commonsense steps to safeguard your personal information, such as signing up for free 24/7 credit monitoring.
• Phishing: Fraudsters often pretend to be IRS agents, accountants or other types of financial professionals. They do so hoping to coax sensitive financial information from consumers, which they can then sell or otherwise exploit for profit. And they often try this type of scheme on recent immigrants who are filing in the U.S. for the first time, commonly threatening deportation as a penalty for noncompliance.

  “Phishing is perhaps the easiest type of tax fraud to avoid,” according to Papadimitriou. “All you have to do is ignore e-mails and phone calls from people purporting to be trustworthy financial officials."

  After all, the IRS explicitly states that it “doesn't initiate contact with taxpayers by email, text messages or social media channels to request personal or financial information.” Furthermore, it “does not threaten taxpayers with lawsuits, imprisonment or other enforcement action,” such as deportation.

  So just remember these IRS protocols, be careful when clicking on emails and ask any over-the-phone phishers that get through to put you on their do-not-call list. If you can manage that, you’ll be just fine.

• Illegitimate Relief / Servicing Companies: Countless companies claim the ability to find hidden deductions, negotiate with the IRS on your behalf or perform other services that sound even vaguely legitimate. Unfortunately, many of them are merely seizing an opportunity to charge high fees for empty promises. And they’ll use creative contract language to limit the need for tangible results, shield themselves from liability and thwart you from doing anything about it.

  “We’ve all seen the budget TV spots and heard the radio ads that spew promises of tax salvation followed by a jet stream of fine print,” said Papadimitriou. “Some of them may even offer modest results due to sheer familiarity with the tax-collection process. Many others, however, simply gouge your bank account without really doing anything to improve your financial situation. The easiest way to ensure that doesn’t happen is to avoid such companies entirely.”

  Before signing anything, just make sure to do your homework: Research the company’s reputation, peruse reviews and carefully read anything that requires a signature, especially a supposedly binding contract.

Tips for Consumers

The tax-fraud prevention playbook differs very little from what you need to do to avoid other types of financial foul play. After all, a tax fraudster needs roughly the same information as someone applying for a loan under your name. So if any signs point to your personal info being exposed, you’ll know that your refund might be at risk, too.

• Familiarize Yourself with the Process: The more you know about how the filing and refund processes are supposed to work as well as what your rights and obligations are as a taxpayer, the harder you will be to scam. So study up. You can start with this basic IRS tutorial..
• Order a Tax Transcript: Considering the IRS will give you a free copy of your records upon request, you can compare your reported income with what they have on file to make sure there aren’t any inconsistencies, which might indicate fraud. You can request your tax transcript here..
• Use the “Too Good to Be True” Test: To some extent, we’re all inclined to be optimistic and to believe the sales pitches we see on TV and hear on the radio, especially if they offer simple solutions for complicated problems.

  More often than not, however, there won’t be any gold at the other end of these glittery promises. So, before signing up for any cure-all program, make sure to ask yourself: 1) Is this too good to be true? and 2) If it’s really that good, why isn’t everyone doing it?

• Know Whom You’re Talking to Be on the lookout for two distinct types of predatory financial companies: 1) those impersonating a trustworthy organization or professional and 2) those offering shady services under their own brand names. Both types are fairly easy to avoid.
• Read the Fine Print: Carefully reading any contract before signing it is basic advice. But it’s especially important when dealing with tax companies given the sheer number of questionable players in the market. Make sure you know exactly what’s required of both you and the service provider, when payments are expected, and what your rights are as a consumer.
• Keep Private Information Private: You should be on the lookout for two distinct types of predatory financial companies: 1) those impersonating trusted sources; and 2) those offering shady services directly under their own brand names. Both types are fairly easy to avoid:
  • Only enter payment information on “https” URLs.
  • Never send account numbers and/or passwords through email.
  • Use passwords that combine numbers, letters, and special characters, and change them on a regular basis.
  • Make sure your computer has up-to-date security software.
  • Get a lockable mailbox (with a slot for the mail carrier) to prevent identity thieves from stealing information, such as pre-approved credit card applications, that they can ultimately use to spend money under your name.
  • Shred financial documents before throwing them away to protect against fraud borne from dumpster diving (which is actually more common than you’d think).
• Sign up for Credit Monitoring: No one has time to watch their credit reports around the clock or deal with the consequences of not doing do. That’s why signing up for free 24/7 credit monitoring is so helpful. It basically acts as an early-warning system for identity theft, fraud and costly credit report errors. So you’ll know when suspicious changes happen and be able to solve any related problems as quickly as possible.
• Review Your Monthly Bills: Credit card companies and other creditors sometimes make mistakes. Unusual balances, transactions or payment history also could indicate unauthorized use of your account. Your monthly bills are a good source of information when you’re looking into issues found on your credit report, too.
• Sound the Alarm for Lost or Stolen Cards: Promptly reporting a missing Social Security card, credit card, debit card, etc., will help limit unauthorized use of your financial accounts as well as your liability for fraudulent transactions.

  If you can’t find your Social Security card, for example, make sure to both call the IRS Identity Protection Unit (1-800-908-4490) and request a replacement from the Social Security Administration. This will help prevent the SSN from being used to steal your refund or your identity more generally.

Ask the Experts: Top Tax Scams & Tips

For more insights into tax fraud and how you can avoid becoming a victim, we turned to a pair of experts on the subject. You can check out the questions we asked them below and you can see their response by clicking on their names.

1. Should people worry about tax fraud?
2. Are there any particular tax scams people should be on the lookout for this year?
3. What are the best ways to avoid tax fraud?

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• Lee G. Knight Hylton Professor of Accountancy, School of Business, Wake Forest University
• Philip Cary Christian Assistant Professor, Institute for Public and Nonprofit Studies (IPNS), Georgia Southern University
• John S. Jahera, Jr. Bobby Lowder Professor of Finance in the Raymond J. Harbert College of Business at Auburn University
• Richard G. Brody Regent Emeritus of the Association of Certified Fraud Examiners and Douglas Minge Brown Professor of Accounting at University of New Mexico and Daniels Fund Business Ethics Fellow
• Andrew M. Brajcich Assistant Professor of Accounting in the School of Business Administration at Gonzaga University
• Dana A. Forgione Professor of Accounting in the College of Business at University of Texas at San Antonio
• David K. Horn Visiting Assistant Professor in the Department of Accounting & Finance at Saint John's University
• Eileen Z. Taylor Associate Professor of Accounting in the Poole College of Management at North Carolina State University

Lee G. Knight Hylton Professor of Accountancy, School of Business, Wake Forest University Should people worry about tax fraud? The incidents of tax fraud have steadily risen, so yes, people should worry about tax fraud. The number one cause of tax fraud is identity theft, which occurs when someone uses a taxpayer’s personal information—name, address, social security number (SSN), and other identifying information—to file a phony tax return for a refund. Taxpayers who fear an IRS audit often fall prey to identity theft because they forget to take the normal steps to safeguard their identities. For example, victims often willingly turn over personal information when an impersonator of an IRS agent calls taxpayers saying they owe money, and then threatens them with jail time, the loss of their business or driver’s license, or deportation if they are a recent immigrant if they fail to pay the money requested. Phishing, which usually involves an unsolicited email from an IRS impersonator or a fake website posing as a legitimate IRS website, often is used to obtain the personal information needed to file the false return. Once identity theft is reported to the IRS, the victim may get his or her refund, but not before going through a lengthy process that requires the victim to file multiple affidavits and gives the IRS time to investigate the fraud. This process can take up to 180 days, and until the fraudster is caught, the victim must take steps to prevent further illegal use of their personal information. While Identity theft is the most prevalent vehicle for tax fraud, other types of tax fraud, such as the following, should concern taxpayers: • Loans with high interest rates and fees given to taxpayers in anticipation of the tax refunds • Tax preparers who promise unreasonably large refunds • Companies who charge large up-front fees in exchange for helping taxpayers manage payments when they owe large sums of back taxes • Sham charities that solicit tax deductible cash donations, but fail to provide charitable assistance or are not charitable organizations qualified by the IRS for tax deductions • Tax shelters that promise to eliminate or substantially reduce a person’s tax liability through sophisticated strategies that lack economic substance What are the best ways to avoid tax fraud? 1. Protect your personal information! Don’t let fear of the IRS overtake your better judgment. The IRS will never contact taxpayers via email or telephone, and IRS agents should not threaten taxpayers 2. Check your bank statements and credit reports frequently for inaccuracies. 3. Contact the IRS immediately if you suspect identity theft or any other tax –related fraud. 4. Check the credentials of your tax preparer. All authorized tax preparers will have an IRS-issued Preparer Tax Identification Number (PTIN), so make sure it is included with the tax preparer’s signature on your tax return. 5. Do not sign your return without reviewing it and make sure you receive a copy of the return. Carefully check, or request a financial expert to check, any arrangement promising to eliminate or substantially reduce your tax liability. Investors who knowingly invest in abusive tax schemes will be investigated and penalized for their participation in the scheme. Philip Cary Christian Assistant Professor, Institute for Public and Nonprofit Studies (IPNS), Georgia Southern University Should people worry about tax fraud? I generally work on tax fraud from the government side: catching taxpayers who commit fraud. But these days there is plenty for taxpayers to worry about as well. Identity theft is the primary concern. If someone steals your identity to file a return in your name and claim a refund, you will not be able to file your own return until the identity theft issue is resolved. If you are due a refund, you may have to wait up to a year to get your account cleared. The IRS is devoting more resources to this issue and wait times are apparently beginning to drop, but the situation is still difficult to manage and the IRS budget has been cut, which does not help in resolving this issue. The best defense for this type of fraud is to protect your identity. Be mindful of the websites you visit. Do not visit or purchase from a website you know nothing about. Make sure you use antivirus software, preferably one that also checks the links you visit for threats, and use a firewall. These tools are easier than ever to use at this point and several totally free options are available that do a wonderful job. There is no excuse for anyone to be without these tools! Finally, watch what you post on social media. Even with privacy filters on you will find it is quite easy for your personal information to get disseminated far and wide. Be very selective of the information you allow to be published, even in a forum where you think only your friends and relatives can see it. John S. Jahera, Jr. Bobby Lowder Professor of Finance in the Raymond J. Harbert College of Business at Auburn University Should people worry about tax fraud? In general, the main concern people should have is in regard to identity theft where someone files for a tax refund under your name. In the broader definition of tax fraud, I do not feel it is a major problem that should cause people too many sleepless nights. Are there any particular tax scams people should be on the lookout for this year? The IRS annually releases its list of the "dirty dozen" tax scams. This was released in early February of this year. Telephone scams have increased where you may get a call from someone claiming to be from IRS and asking for information. IRS says no one should send money or offer personal information if such a call is received. Next on the list is email "phishing" where again someone is trying to get you to offer personal and financial information. There is also of course the possibility of tax preparer fraud where unethical tax preparers cheat people out of their refunds. Note that the vast majority of preparers are highly competent and ethical but nonetheless there are some "bad apples" out there. Another tax scam is a charity that purports to be legitimate so you can deduct your contribution when the charity is not in fact an approved nonprofit. These are just a few of the types of scams out there. You can always go to the IRS website and see the full list of their "dirty dozen." What are the best ways to avoid tax fraud? Guard personal information like it is top secret, because it is. Change passwords frequently. Watch for any illicit activity on credit cards and things like. Just do the basics and pay attention to everything going on in your financial life. Monitor checking accounts, credit card statements, etc. If you use a tax preparer, check out their credentials and only deal with a reputable preparer. Richard G. Brody Regent Emeritus of the Association of Certified Fraud Examiners and Douglas Minge Brown Professor of Accounting at University of New Mexico and Daniels Fund Business Ethics Fellow Should people worry about tax fraud? Yes! People should worry and perhaps the worrying will result in fewer cases of tax fraud. Tax fraud is often linked to identity theft and everyone should also be worrying about identity theft. Tax fraud and identity theft are serious and all-too-common, so people need to be taking precautions in their daily life. Your life will change drastically if you become a victim so you want to avoid becoming one. It can happen to you! Are there any particular tax scams people should be on the lookout for this year? The top scam is probably when someone else fraudulently files your tax return. The fraudster uses your Social Security number, files the return using online software and claims a refund (regardless of whether you are entitled to one). You then attempt to file your return only to be told that a return has already been filed using your Social Security number. Then the nightmare begins -- paperwork must be filed with the IRS (and others) to address this problem and it will take up your time and, most likely, your sanity. What are the best ways to avoid tax fraud? The short answer is that there are two good ways (but they sound much easier than they are). First, file your taxes as early as possible. This gives the fraudster less opportunity to file a return using your Social Security number. Second, do not become a victim of identity theft. There are various ways that this fraud occurs, but most result from the stealing of your personal information. One method is to use phishing to obtain information from an unsuspecting taxpayer. A person gets an email asking for personal information, often the information needed to access online tax preparation software. To avoid this, do not reply to emails from the “IRS.” If you receive an email from the “IRS,” it is a scam as they do not contact taxpayers via email. Do not click on any links and do not reply. The same holds true for other emails you may receive asking for personal information or asking you to click on an attachment. Do not reply to emails or click on attachments from unknown individuals. Do not give out your Social Security number unless legally required to do so and do not carry your Social Security card with you (it should be kept in a secure location). Be aware of data breaches. If you are notified that a data breach has occurred (for example, with your credit card company or, even worse, with your tax software provider), know that you are now at risk to having your identity stolen. Do not throw away information without shredding it as identity thieves may go through your trash and steal personal information that they find. Having your personal information may lead to tax fraud or even more significant other identity theft issues. The bottom line is that criminals can now commit these crimes without leaving their homes. Identity theft has been called the fasting growing crime in America and it is up to each individual to protect his or her personal information. Indifference, denial or laziness may result in someone becoming a victim of identity theft with tax fraud being just one possible negative outcome. Andrew M. Brajcich Assistant Professor of Accounting in the School of Business Administration at Gonzaga University Should people worry about tax fraud? Are there any particular tax scams people should be on the lookout for this year? First, a quick clarification. Tax fraud usually refers to someone taking a fraudulent position on a tax return or with the IRS. Based on your subject line, I believe you are referring to tax scams where crooks attempt to steal refunds, obtain social security numbers, file false returns as someone else, collect payment etc. For certain, there can be overlap between the two. Here, I will focus on scams. I think people should be concerned with financial scams in general. Tax scams are just one form of the same old trick: using deceit to trick you out of your money. The basic scenario is the scammer(s) claims to be the IRS to fool an unwitting taxpayer. Most scams today seem to involve phone calls -or- phishing emails. The scammers indicate a tax refund is available and request personal information, like bank account details or social security numbers, or demand payment and possibly use threats. Scammers are endlessly devising new schemes, so there is no way to provide an exhaustive list of examples. I think a simple rule to remember in order to avoid a scam is that the IRS does not call or email out of the blue. They send letters as an initial correspondence if there is a concern. Nor does the IRS threaten to imprison taxpayers or demand payment be made with gift cards or prepaid debit cards. They operate in cash and respect the due process of law. I would also add another area of tax scams many don’t think about. It’s perpetrated by companies that offer services in helping delinquent taxpayers negotiate with the IRS for pennies on the dollar. To be clear, there are many good professionals out there that can help resolve your issues with the IRS. However, in the last 20 years I’ve seen an increase in instances where taxpayers hire a company to help them deal with the IRS only to be left paying exorbitant amounts for simple filings. Having spoken with former employees of one of these companies, I’ve learned that the business environment is reminiscent of what was seen at Enron two decades ago or more recently, at Wells Fargo involving unauthorized accounts being established for customers in order to push sales numbers. Some of these "help” firms operate in much the same way. The concern is not helping the client resolve the tax matter, rather, it’s how much money can they squeeze out of each client. If the taxpayer pays for the services quickly, they are marked as someone who has means. Bilking more money out of the client is done by over-exaggerating the seriousness of the tax issue, intentionally not resolving all the issues and then returning to the client with “another problem” that needs to be taken care of, or overplaying the complexity of the services being offered. All of these inevitably necessitate more payment from the scared taxpayer for a "quick resolution." Most often, these companies file forms the taxpayer could easily have done with a little research. The “professionals" at these firms often have little or no credentials, other than being deceptive. What are the best ways to avoid tax fraud? If you have an issue with the IRS and want help, see a CPA or tax attorney. They may seem more expensive up front, but they’re likely to be cheaper in the end and you can rest easy with the resolution they provide. Dana A. Forgione Professor of Accounting in the College of Business at University of Texas at San Antonio Should people worry about tax fraud? While most people will not experience tax fraud, there are many schemes out there and the consequences can be severe. Like any fraud, scam activity follows the money, and tax refund season is a prime target. Are there any particular tax scams people should be on the lookout for this year? The IRS puts out a list of top scams and this was recently summarized very nicely by Sally P. Schreiber, J.D, as the "Dirty Dozen" for the American Institute of Certified Public Accountants. What are the best ways to avoid tax fraud? Keep your wits about you, don't be tempted by promises of refunds too good to be true, don't rationalize frivolous tax avoidance arguments, and if a pitch sounds convoluted and questionable, it's probably a scam. And never give out your personal financial information or social security number to anyone over the phone, through email, or whom you do not know and trust. The IRS will contact you by regular mail if they need to communicate with you. They will never contact you with threatening phone calls, or by email. David K. Horn Visiting Assistant Professor in the Department of Accounting & Finance at Saint John's University Should people worry about tax fraud? Yes and no. Tax scams are a real problem, but there are ways to avoid getting caught in the trap. Protecting your identity and not having an irrational fear of the IRS is the best protection. Are there any particular tax scams people should be on the lookout for this year? Two scams come to mind. One is the most obvious. Scammers steal an individual’s identity and file false returns using misappropriated information. The false returns claim a refund on behalf of the stolen identity. That is, the scammer will make up income and deductions about the taxpayer in order to receive a cash refund from Uncle Sam. This can cause huge headaches for taxpayers when it comes time to filing their actual, legitimate returns. The second scam relates to scammers calling taxpayers claiming they are the IRS and that the individual has back taxes due to the government. The scammer will claim that if the individual doesn’t send payment immediately, swift and punishing legal action will result. The payment is generally required in some strange currency such as gift card redemption codes or prepaid phone cards. What are the best ways to avoid tax fraud? Protect your identity. Have strong passwords to online accounts, change passwords regularly, don’t open suspicious emails, and be careful who you give personal information to. Like any other identify theft, reckless regard for your personal information can be costly. Also, know the IRS doesn’t call and demand payment. The IRS operates in slow and official methods. Letters are sent and responses are required in writing. Rarely, if ever, does the IRS operate over the phone unless the conversation is initiated by the taxpayer. Finally, if you received correspondence from the IRS and you are not positive as to its legitimacy, contact a tax professional such as a CPA, EA or tax attorney. These professionals are trained in handling controversy with the IRS and can assist in guiding and resolving any tax issues you may have. Eileen Z. Taylor Associate Professor of Accounting in the Poole College of Management at North Carolina State University Should people worry about tax fraud? Fraud in general can be devastating. Tax fraud, depending on the scheme, can cause a range of problems, some greater than others. For example, if you are in the process of taking out a mortgage, and find out that someone has fraudulently filed a return using your identity, you could find yourself unable to correct the situation in time to make the home purchase. At the very least. when someone steals your identity and files a return under your name, you will need to spend a significant amount of time correcting the issue with the IRS, and you may need to wait longer to receive your refund (if you are due one). Are there any particular tax scams people should be on the lookout for this year? I think identity theft continues to be a common tax fraud scheme. You may not even know it has occurred until you file your return and find out someone has filed it for you already (and typically, they file a return that qualifies them for a refund or an EITC (earned income tax credit). Let's face it, no one is likely to steal your identity, file your return, and pay your tax bill. What are the best ways to avoid tax fraud? As with other identity frauds, be diligent with your PII (personally identifiable information). Protect your phone and computer, as well as your email with complex passwords (you can use password managers such as LastPass to generate and store random passwords for you). Destroy paperwork with your social security number, take care when posting information to social media, don't provide a social security number unless it is required (most times it is not). File your tax return early, to get ahead of those who would file fraudulently using your name. Ask for direct deposit of your refund check (if you have one), rather than having it mailed to you. The IRS website has some good information as well.

 

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