Another year has gone by and now it’s time to prepare our taxes. Taxpayers should use caution to protect themselves against a wide range of scams including identity theft and even return preparer fraud. The Internal Revenue Service (IRS) prepares a list of tax scams that consumers can fall prey to at any point during the year. However, most of these schemes peak during the filing season. Victims of illegal scams may encounter significant penalties and interest or criminal prosecution. The IRS Criminal Investigation Division works closely with the Department of Justice to identify scams and prosecute the criminals behind them. Schemes evolve from year to year but the underlying themes tend to stay the same. Below you’ll find the most popular tax scams or for a full list of the Dirty Dozen Tax Scams for 2012 from the IRS click here.
Identity Theft cases are among the most intricate cases the IRS handles. Identity thieves are looking for ways to use a genuine taxpayer’s identity to file a tax return and claim a fraudulent refund at a rising rate. The IRS is committed to working with taxpayers who have become victims of identity theft and have implemented a tough screening process to stop fraudulent returns. Victims may not be aware their identities have been stolen until they receive a notice from the IRS informing them they’ve filed more than one return, or that the taxpayer received wages from an unknown employer. Anyone who believes they have had their identity stolen and used for tax purposes should immediately contact the IRS Identity Protection Specialized Unit. For more information visit the IRS’ Special Identity Theft page at www.irs.gov/identitytheft.
Phishing scams are generally carried out through fake websites usually listed in unsolicited emails. The websites pose as authentic sites to lure in victims and prompt them to provide valuable information. The criminal uses the information to commit identity or financial theft. Consumers who receive unsolicited emails that appear to be from the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), should forward them to firstname.lastname@example.org. The IRS urges consumers to remember they do not initiate contact with taxpayers by email, text message, or social medial to request personal or financial information.
Return Preparer Fraud
A large percentage of taxpayers use tax professionals to prepare and file their tax returns each year. While most preparers provide a reputable service to their clients, an alarming number prey on unsuspecting taxpayers. Preparers commit fraud by skimming off their clients’ refunds, charging inflated fees for return preparation services, and by promising guaranteed or inflated refunds. Taxpayers should choose carefully when hiring a tax preparer and watch for these warning signs of a dishonest preparer:
- Do not sign the return or place Preparer Tax Identification Number (PTIN) on it. All tax preparers need to have a PTIN.
- Do not give the client a copy of the return.
- Promise larger than normal refunds.
- Charge a percentage of the refund amount as a preparation fee.
- Require the taxpayer split the refund to pay the preparation fee.
- Add forms to the return that a taxpayer has never filed before.
- Encourage the taxpayer to place false information on the return, such as false income, expenses or credits.
For more information on how to find a competent tax professional please visit Tips for Choosing a Tax Preparer.
Hiding Income Offshore
Many individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts, or nominee entities and using wire transfers, debit or credit cards to access the funds. Others use foreign trusts, employee-leasing schemes, and private annuities or insurance plans for the same purpose. The IRS works closely with the Department of Justice to prosecute tax evasion cases. The legitimate reasons for maintaining financial accounts abroad have certain reporting requirements that must be fulfilled by taxpayers. U.S. taxpayers that retain offshore accounts and do not fulfill the reporting and disclosure requirements are breaking the law and risk significant penalties, fines, and even criminal prosecution.
“Free Money” from the IRS & Tax Scams Involving Social Security
Fraudulent preparers have been targeting senior citizens and low income individuals on a growing basis. Some advertise free money from the IRS, others promise non-existent Social Security rebates, or non-existent stimulus payments based on credits like the American Opportunity Tax Credit. Scams involving Social Security are rampant as well. For instance, a taxpayer may be due a credit or refund but the preparer will inflate the information to complete the return. The IRS also noted that one deviation of the scheme involves claiming the college credit is available to compensate people for paying taxes on groceries. Promoters of these scams may charge large upfront fees to file the claims and then are nowhere to be found when the victim is denied the refund or discovers the scam. The IRS would like to remind people to be careful because all taxpayers, including those who use paid tax preparers, are legally responsible for the accuracy of their returns, and must repay any refunds received in error.
False or Inflated Income and Expenses
Another popular scam is claiming false or inflated income and expenses, including income that was never earned either as wages or as self-employment income, in order to maximize refundable credits. A taxpayer claiming income they did not earn or expenses they did not pay in order to secure larger refundable credits can have serious consequences including repaying the inaccurate refunds with interest and penalties, and even prosecution.
The Internal Revenue Service should be releasing their Dirty Dozen Tax Scams for 2013 in February 2013. Visit them online at http://www.irs.gov/.
Consumers who believe they have fallen victim to a scam or who would like to report fraudulent activity may do so at www.coloradoattorneygeneral.gov/complaint. For additional information please call our office at 800-222-4444.
Consumer awareness is the most powerful tool available in preventing Coloradans from falling victim to scams and identity theft. Our goal is to keep Colorado consumers apprised of the latest scams targeting the state’s residents to assist in preventing further victimization and to provide valuable informational guides for consumers.
Consumers can sign up to receive future electronic fraud advisories and the Consumer Fraud Bulletin Here. The Office of the Attorney General will circulate this information in conjunction with AARP ElderWatch.