We’re all aware of the damage that scammers can do to our financial lives. And they are particularly active during the tax season. So much so that the Internal Revenue Service has created a list of tax scams called the “Dirty Dozen.” These scams fall into two categories: scams done to the taxpayer and scams done by the taxpayer.
Let’s start with the list the tax scams done by taxpayers. It’s very important that both you and your tax preparing service avoid all of these practices. Remember that you are responsible for what is on your tax return even if someone else prepared it.
- Return Preparer Fraud: About 60 percent of taxpayers use tax professionals to prepare their returns. And, as you’d expect, there are a few bad apples in this crowd. These dishonest preparers perpetrate refund fraud, identity theft and other scams that hurt taxpayers.
- Offshore Tax Avoidance: This involves hiding money and income offshore. Recent prosecutions of individuals and financial institutions demonstrate how risky this is.
- Inflated Refund Claims: Taxpayers should be wary of anyone who asks them to sign a blank return, promises a big refund before looking at their records or charges fees based on a percentage of the refund. Scam artists use flyers, advertisements, phony store fronts and word of mouth via community groups and churches in seeking victims.
- Hiding Income with Fake Documents: Using false Form 1099s or other fake documents is a scam that taxpayers should always guard against. Financial institutions often provide this information to both you and the IRS.
- Abusive Tax Shelters: Be on the lookout for people peddling tax shelters that sound too good to be true. When in doubt, taxpayers should seek an independent opinion regarding complex products they are offered.
- Falsifying Income to Claim Credits: Taxpayers are sometimes talked into inventing income to erroneously claim tax credits by scam artists.
- Excessive Claims for Fuel Tax Credits: The fuel tax credit is generally limited to off-highway business use, including use in farming. Consequently, the credit is not available to most taxpayers.
- Frivolous Tax Arguments: Frivolous schemes that encourage taxpayers to make unreasonable and outlandish claims are wrong and have been thrown out of court. The penalty for filing a frivolous tax return is $5,000.
Now, for the list of scams done to taxpayers:
- Phone Scams: If you’re called by someone claiming to work for the IRS, be very skeptical. The IRS won’t call you about any matter without first having written to you to alert you. Scammers will impersonate IRS agents and may try to scare you with threats of arrest, penalties, deportation and so on. Hang up and call the IRS on your own if you’re worried about it.
- Phishing: This is when criminals use fake emails or websites to steal personal information. These can look very convincing. The IRS never initiates contact with you by email. Taxpayers should be wary of clicking on strange emails and websites.
- Identity Theft: This occurs when someone steals your Social Security number and files a false return asking for a refund. One technique for minimizing this risk is to file early before scammers file their fraudulent return.
- Fake Charities: It’s best to stick with charities you know or to check them out online. To play it safe, never donate to an organization that approaches you on the phone or at the door. A charity must be qualified with the government to be tax deductible.A financial planner can help you evaluate tax correspondence to determine whether it’s legitimate or a scam. Guidepost Financial Planning is able to help you with this and all other aspects of your financial planning. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.