Tax scams are common enough that the Internal Revenue Service issues a “Dirty Dozen” list of tax scams every year. And sadly, con artists are getting increasingly resourceful at finding ways to trick people and steal their information and money.
Tax scams come in many flavors, and the schemes involve everything from identity theft to preparer fraud to scam phone calls. The IRS encourages taxpayers to stay vigilant and be aware of these aggressive ruses, which can happen at any time but often increase in the months leading up to tax-filing season.
The good news is the IRS, states and the tax industry have taken aggressive steps in recent years to try and combat scams. There are also things you can do to minimize your risks, including learning how to recognize the common scams and taking steps to protect your data.
Tax-Related Identity Theft
Tax-related identity theft affects hundreds of thousands of consumers every year and costs the country billions of dollars. Recovering from this sort of tax fraud is an onerous task, and it can take months or even years to get your life back on track.
In these situations, the fraudsters somehow get ahold of your personal information, fill out your 1040 and hijack your tax refund. Usually, the consumer doesn’t realize anything is wrong until they go to file their tax return, and it’s rejected. The IRS only accepts one return for every Social Security number.
While the IRS has managed to crack down on fraudulent returns in recent years, the problem is still significant. In 2018, con artists filed 649,000 fraudulent returns and attempted to get $3.1 billion in refunds. That’s a small uptick from the 597,000 fraudulent returns confirmed in 2017, according to the IRS, but still well below the 1.4 million in identity theft cases in 2015 and the 883,000 in 2016.
Some red flags that indicate you may have experienced taxpayer-related identity theft include:
- Your return is rejected when you try to file it electronically.
- You unexpectedly owe additional tax dollars or notice a reduction in your refund (known as a refund offset), or the IRS is taking collection actions against you for a year in which you didn’t file a tax return.
- IRS records show your wages or income from an employer for whom you never worked.
If you have fallen victim to identity theft, the IRS says you still need to pay your taxes and file a tax return. You may have to file paper returns by mail.
Phishing scams are just one of many ways con artists can try to get your Social Security number and other personal information. A phishing scam may be in the form of an unsolicited email, text message or a website posing as the IRS. Criminals will try to confuse you to get you to provide sensitive personal and financial information.
The IRS will never initiate contact with taxpayers via email, text or social media.
Watch out for these warning signs that you’ve received a phishing email:
- The email makes bogus claims that you are due a tax refund.
- The email offers to track your refund.
- The email makes fake claims that you’re being audited.
- The email provides links that are supposedly about new tax law changes.
If you receive such a request, don’t reply to it or open any attachments or links. Doing so could infect your computer or phone with malware. Instead, forward the email to firstname.lastname@example.org and delete the original email.
IRS Imposter Scams
IRS imposter scams don’t usually involve your tax returns. Instead, they play off peoples’ fears of the federal agency. The scams usually involve someone calling and claiming to be an IRS agent.
In many cases, the callers will threaten you with arrest, deportation and other harsh consequences unless you do what they demand. In some cases, the callers may ask for personal information, such as your Social Security numbers, PIN numbers and other sensitive financial data.
Other times, the callers may tell you that you owe debts to the IRS and instruct you to go to the store, purchase gift cards and provide them with the gift cards or prepaid debit cards to pay your debt. They may ask you to wire them money.
These imposters are often intimidating, threatening and abusive.
Consumers in North Carolina lost nearly $86,000 to this scam between 2017 and 2018, according to North Carolina Attorney General Josh Stein. The victims included a man who was tricked into buying $4,000 worth of iTunes gift cards. He was threatened with jail unless he complied. All told, Americans lost $488 million to imposter scams in 2018, according to the Federal Trade Commission.
Unscrupulous tax return preparers can also take advantage of people. In 2018, the FTC received 4,103 reports of tax preparer fraud.
Tax preparer fraud or misconduct can take on many forms, including:
- Inventing income to claim credits or creating false exemptions to increase your refund
- Creating false expenses, credits or deductions to increase your refund
- Filing your 1040 return without your consent or knowledge
- Altering your tax return
- Sending your refund to someone else
Beware of a tax preparer who promises a big refund or asks you to sign a blank tax return. Preparers who charge you fees based on a percentage of your return are also probably up to no good. These hucksters will often use flyers and phony storefronts to recruit victims. You may also hear about them by word of mouth.
The IRS also urges consumers to beware of what it calls “ghost preparers,” or people who put your return together but don’t sign it themselves. Instead, they print it, and tell you to send it to the IRS. If they’re filing for you online, they may refuse to digitally sign your return.
Here are a few red flags that may signal you’re working with a ghost preparer:
- They require cash payment.
- They won’t provide a receipt for their services.
- They invent income or claim false deductions to boost your refund.
- They direct your refund into their own bank account instead of yours.
It’s important to realize that you’re responsible for whatever is on your tax return, even if it’s prepared by someone else. And falling for scams like these can end up costing you money in the form of back taxes, with interest and penalties.
Your best bet is to choose a reputable tax preparer who you can trust. Remember, you’ll be giving them the most sensitive information about your life, including details about your spouse, income, children, and of course, your Social Security number.
Frivolous Tax Arguments
Beware of those who make “frivolous tax arguments” to avoid paying taxes.
The promoters of these schemes often argue that paying taxes is voluntary, that wages and tips aren’t really income, or that you can refuse to pay taxes on religious grounds. Another common frivolous tax claim is that you can claim you’re a citizen of the state you live in, but you reject your United States citizenship. Some have even argued that the IRS is an illegitimate government agency that should not exist.
Don’t fall for any of these arguments. Such claims are outlandish and will accomplish little other than getting you in trouble with the IRS and costing you more money in the long run. The IRS will fine you $5,000 for filing a “frivolous return,” and you could end up facing other sorts of fines and criminal prosecution for attempting to evade paying taxes.
Fake Charities and Other Scams
Fake charities can also leave unsuspecting taxpayers in a pickle. The charities may have names like other well-known charitable organizations, and they’ll promise you can deduct the funds you donate.
That’s why it’s important to do your due diligence. Before donating any cash, you can search the IRS’ exempt organization’s database.
If you or your business makes a lot of charitable contributions, you may also want to check GuideStar’s Charity Check search tool. For $75 a month, it will tell you whether a charity meets all five of the IRS’ requirements for tax-exempt status, and it will notify you if nonprofits you follow have their tax-exempt status revoked.
Other Common Tax Schemes Included in the IRS’ 2019 “Dirty Dozen” Scam List
- Offshore Tax Avoidance:
- Hiding money and income in offshore accounts can get you in a heap of trouble. The IRS says the best bet is to come clean and pay Uncle Sam what he’s owed.
- Excessive Business Credit Claims:
- The fuel tax credit and research credit are just two examples of unusual tax credits most businesses aren’t qualified to take.
- Abusive Tax Shelters:
- Abusive tax shelters are investment schemes that often channel funds through trusts and partnerships to avoid being taxed. They generally serve no purpose other than to reduce the taxpayer’s tax burden without reducing their actual income or assets.
How to Report a Scam
If you suspect a tax scam or have fallen victim to one, you should report it to the IRS immediately. The form you will use depends on the situation:
- Identity Theft:
- If your identity was stolen, you’ll need to submit an Identity Theft Affidavit.
- Suspected Fraud:
- If you suspect someone else is not complying with tax laws, you can submit an Information Referral form. This is the form you would use to report the following suspected activities: False exemptions or deductions; kickbacks; fake documents; failure to pay taxes; unreported income; organized crime; and a failure to withhold taxes.
- Charity Scams:
- If you suspect fraud by a charity, you can submit a Tax-Exempt Organization Complaint.
- Imposter Scams:
- You can report an imposter scam on the website for the Treasury Inspector General for the Tax Administration.
- Phishing Scams:
- You can report phishing scams to email@example.com.
- Preparer Fraud:
- If your tax preparer acts improperly, you can and should report him or her for misconduct. If you suspect preparer fraud, you can submit a Return Preparer Complaint.
How to Avoid Scams
As always, prevention is your best protection. You can check out your tax preparer’s qualifications before hiring them through the IRS’ directory of federal tax return preparers. Also, filing your tax return early can lower your chances of falling prey to an identity theft scheme.
Because data breaches can also increase your risk of tax-related identity theft, the IRS recommends that you take the following precautions:
- Use strong, unique passwords for every online account.
- Make sure your security software comes with a firewall and virus protections, and that the protections are always turned on. Encrypt all sensitive files, including your tax returns.
- Familiarize yourself with common scam tactics, such as phishing emails, imposter calls and fake texts from thieves. Never click on links or download attachments in a suspicious email or text message.
- Keep your personal data safe. Be sure you can trust a website before you enter your financial information and only shop at reputable online retailers. Keep your Social Security card someplace safe and don’t make a habit of carrying it on you. Likewise, keep your tax records in a safe, secure location.
If you or someone you know has become a victim of tax-related identity theft, there are several steps you’ll want to take immediately.
- If you have been notified via IRS letter/notice, call the number provided immediately.
- If you are trying to file your taxes electronically and are rejected because of a duplicate filing under your Social Security number, complete an IRS Form 14039, Identity Theft Affidavit. Print the form, attach it to your tax return, and send it to the IRS via mail.
- You can also contact the IRS directly for help by calling their specialized assistance line at 1-800-908-4490.
Additionally, you’ll want to:
- File a police report with your local law enforcement.
- File a complaint with the FTC at www.identitytheft.gov or by calling the FTC Identity Theft hotline at 1-877-438-4338.
- Contact one of the three major credit bureaus (Equifax, TransUnion or Experian) and place a “fraud alert” on your records.
- Contact your banks, credit cards and other financial institutions to notify them of the problem and close any fraudulent accounts opened under your name.
27 Cited Research Articles
- Consumer Reports. (2019, March 1). Scams to Avoid This Tax Season: More consumers are complaining about imposters claiming to be from the IRS. Retrieved from https://www.consumerreports.org/scams-fraud/how-to-avoid-tax-scam/
- Federal Trade Commission. (2018). Consumer Sentinel Network Data Book 2018 Snapshot. Retrieved from https://www.ftc.gov/sites/default/files/u269/csn-data-book-2018-infographic.png
- Federal Trade Commission. (2019, February). Consumer Sentinel Network: Data Book 2018. Retrieved from https://www.ftc.gov/system/files/documents/reports/consumer-sentinel-network-data-book-2018/consumer_sentinel_network_data_book_2018_0.pdf
- Federal Trade Commission. (n.d.). IRS Imposter Scams. Retrieved from https://www.consumer.ftc.gov/media/video-0118-irs-imposter-scams
- Internal Revenue Service. (2015, February 6). Frivolous Tax Arguments Completes the IRS “Dirty Dozen” List of Tax Scams for the 2015 Filing Season. Retrieved from https://www.irs.gov/newsroom/frivolous-tax-arguments-completes-the-irs-dirty-dozen-list-of-tax-scams-for-the-2015-filing-season
- Internal Revenue Service. (2016, April). Information Referral. Retrieved from https://www.irs.gov/pub/irs-pdf/f3949a.pdf
- Internal Revenue Service. (2017, April). Identity Theft Affidavit. Retrieved from https://www.irs.gov/pub/irs-pdf/f14039.pdf
- Internal Revenue Service. (2018, December 19). Tax Fraud Alerts. Retrieved from https://www.irs.gov/compliance/criminal-investigation/tax-fraud-alerts
- Internal Revenue Service. (2018, June). Return Preparer Complaint. Retrieved from https://www.irs.gov/pub/irs-pdf/f14157.pdf
- Internal Revenue Service. (2019, April 8). IRS Security Summit. Retrieved from https://www.irs.gov/newsroom/irs-security-summit-partners-mark-significant-progress-against-identity-theft-key-taxpayer-protection-trends-continue
- Internal Revenue Service. (2019, April 15). IRS concludes “Dirty Dozen” list of tax scams for 2019: Agency encourages taxpayers to remain vigilant year-round. Retrieved from https://www.irs.gov/newsroom/irs-concludes-dirty-dozen-list-of-tax-scams-for-2019-agency-encourages-taxpayers-to-remain-vigilant-year-round
- Internal Revenue Service. (2019, April 26). Taxpayer Guide to Identity Theft. Retrieved from https://www.irs.gov/newsroom/taxpayer-guide-to-identity-theft
- Internal Revenue Service. (2019, February 7). IRS: Don’t be victim to a ‘ghost’ tax return preparer. Retrieved from https://www.irs.gov/newsroom/irs-dont-be-victim-to-a-ghost-tax-return-preparer
- Internal Revenue Service. (2019, May 3). IRS Wants You to Know About Schemes, Scams and Cons. Retrieved from https://www.irs.gov/compliance/criminal-investigation/irs-wants-you-to-know-about-schemes-scams-and-cons
- Internal Revenue Service. (2019, May 31). Tax Scams — How to Report Them. Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/tax-scams-how-to-report-them
- Internal Revenue Service. (n.d.). Directory of Federal Tax Return Preparers with Credentials and Select Qualifications. Retrieved from https://irs.treasury.gov/rpo/rpo.jsf
- Internal Revenue Service. Tax-Exempt Organization Complaint. Retrieved from https://www.irs.gov/pub/irs-pdf/f13909.pdf
- Internal Revenue Service. Taxes. Security. Together. (2019, April 8). We all have a role to play in protecting your data. Retrieved from https://www.irs.gov/individuals/taxes-security-together
- Internal Revenue Service. The Truth About Frivolous Tax Claims. Retrieved from https://www.irs.gov/privacy-disclosure/the-truth-about-frivolous-tax-arguments-section-i-a-to-c#C
- Kagan, J. (2018, June 14). Abusive Tax Shelter. Retrieved from https://www.investopedia.com/terms/a/abusive-tax-shelter.asp
- Little, B. (2019, February 13). All the Weird Ways People Have Tried to Avoid Paying Taxes. Retrieved from https://www.history.com/news/ways-to-avoid-paying-taxes-irs-reasons
- Michigan Department of Attorney General. IRS Phone and Email Tax Scams. Retrieved from https://www.michigan.gov/ag/0,4534,7-359-81903_20942-186793--,00.html
- Poremba, S. (2019, March 9). What to Do If You’re a Victim of Tax Identity Theft. Retrieved from https://www.experian.com/blogs/ask-experian/what-to-do-if-youre-a-victim-of-tax-identity-theft/
- Rae, D. (2019, February 11). 6 Tips to Avoid Being a Victim of Tax Scams. Retrieved from https://www.forbes.com/sites/davidrae/2019/02/11/tax-scams/#378004d01e81
- Stoogenke, J. Victim pays IRS imposter $4,000 in iTunes gift cards. Retrieved from https://www.wsoctv.com/news/action-9/victim-pays-irs-impostor-4000-in-itunes-gift-cards/737008316
- Treasury Inspector General for Tax Administration. (2016, February 21). IRS Impersonation Scam Reporting. Retrieved from https://www.treasury.gov/tigta/contact_report_scam.shtml
- USAA. (2019, March 20). Watch Out for These 6 Common Tax Season Scams. Retrieved from https://www.usaa.com/inet/wc/advice-finances-avoidtaxscams?akredirect=true