IRS Scams to Avoid in 2017
Today we are going to review and comment on what the IRS sees as the biggest tax scams out there. Some of these scams make a victim of the taxpayer, such as identity theft, and some of these involve bilking the government directly, thus making all taxpayers the ultimate victims.
Phone Scams: These have made the most headlines in the past couple years, and rightfully so. Typically someone calls as an IRS agent and demands immediate payment or they will send the cops to arrest you, issue a warrant, or some other ominous legal threat. They then will have you “pay your tax bill” in various ways, including, I kid you not, buying iTunes gift cards and giving them the codes. People fall for this – and not just a few.
According to the Treasury Inspector General for Tax Administration (TIGTA) about 736,000 scam contacts occurred since October 2013. Nearly 4,550 victims have collectively paid over $23 million as a result of the scam.
The IRS has always been emphatic that it will NEVER call you to demand immediate payment, nor will the IRS call you if you owe taxes, without first sending you a bill in the mail. Now making matters worse, the IRS has outsourced collections to private collection agencies. Now you may get a call from a scammer, a tax relief company hoping to help defend you, or a private collection agency. Are you confused yet? So is the IRS.
Phishing: This is when you get an email that leads you to a website that looks legitimate but is really stealing your information. You may enter your username or password as you normally would, or it could be your credit card or social security number. There are many variations but the common theme is someone stealing your information for profit. The IRS doesn’t email about bills or refunds send taxpayers an email about a bill or refund or account verification, so don’t click on email from the IRS.
Return Preparer Fraud: There are people who will pose as a legit tax preparer but in actuality are stealing your information or planning to highjack your return. Most tax professionals provide honest high-quality service but there are some dishonest preparers who open a short term office and execute refund fraud, identity theft, and other scams. Best advice is to choose someone who has been around a while and is not the cheapest in town.
Inflated Refund Claims: In addition to the above, do not get sucked into the promise of a “great refund.” If a tax preparer is promising you a bigger refund than the next guy, or promising a refund in general, you should be on red alert. Your refund is what it is. Be wary of anyone who asking you to sign a blank return, promising a big refund before looking at your records. If someone wants to charge based on a percentage of the refund, walk away.
Offshore Tax Avoidance: Unless you are very wealthy or you have legitimate business in foreign lands, stay away from any offshore related tax shelters or “tax free” investments. If you have gotten yourself entangled in one of these, the IRS offers the Offshore Voluntary Disclosure Program (OVDP) to help people get back on track.
Fake Charities: Be aware that some fake charities exist and you cannot deduct these contributions on your taxes. It is of course illegal to set up a fake charity, collecting money and just putting it in your pocket. Even if you were to do some “good” with the money, there are very specific forms, rules, and accountings that must be followed. In short, it’s criminal to set up a fake charity.
On the other side of the coin, if you contribute to a fake charity and attempt to deduct said contributions, you will have that deduction disallowed. The most common deployment of fake charities is immediately after a natural disaster. A “charity” will be set up to help the victims. It will look legit and have a very short lifespan. These fake charities are usually after not only your money up front but also your information. Identity theft is rampant and fake charities are just one gateway. You can actually go to IRS.gov and check out the legal status of charitable organizations.
Falsely Padding Deductions on Returns: Avoid the temptation of inflating deductions or expenses on your tax returns. While you may get a short term refund or may owe less, the IRS will probably catch you eventually and you will owe not only the original tax, but also will owe penalties and interest. Or worse. Knowingly filing a false tax return is illegal.
Excessive Claims for Business Credits: Avoid misuse of the research credit. Improper claims generally involve failures to participate in or substantiate qualified research activities. Also, avoid claiming the fuel tax credit if you do not qualify. Most people do not qualify. This is generally limited to off-highway business use, including use in farming.
Falsifying Income to Claim Credits: The Earned Income Tax Credit has gotten a lot of scrutiny because it has been abused, so much so that this year the IRS is delaying millions of returns that are filing for the Earned Income Tax Credit. Do not inflate income to get this. It can lead to criminal prosecution, or at the least serious tax bills with penalties and interest.
Abusive Tax Shelters: Sure the rich people do it. Even President Trump bragged he didn’t pay taxes because of tricky loopholes and shelters. But don’t be tempted unless you have a $1000 an hour attorney. We regular folk will get the short end of the stick with the IRS for trying those games.
Frivolous Tax Arguments: These range from the “constitution doesn’t allow the federal government to collect taxes,” to the argument that taxes are “voluntary.” Good luck with these and other stupid and wrong notions. The penalty for filing a frivolous tax return is $5,000. And you’ll still owe the tax.