The 7 Biggest Tax Scams and How to Avoid Them

April 16th, 2014
in Op Ed

by Sandy Botkin, Daily Reckoning

Getting caught up in a tax scam can occur at any time of year. But your chances of getting scammed peak during that jolly season when you dutifully file your taxes. This is why, leading up to April 15, the IRS releases a list of the top tax scams they see being perpetrated around the nation.

It's important that you be aware of these and take precautions to protect yourself. Failing to do so can result in not only significant penalties and having to pay interest but even possible criminal prosecution.

Follow up:

With that, let's go through them one by one.

1. Identity Theft

At the top of this year's list is tax fraud through identity theft. This occurs when someone obtains your personal information and then uses it to commit some crime. One of the more typical examples is when a thief uses your information to file a tax return on your behalf and then claims your refund for themselves.

What to do: You can mitigate against this by filing your taxes as early as possible. A fraudster can't claim your refund if you've already received it. But if you believe you've been the victim of identity theft, you should contact the IRS immediately. In fact, they have a special section on their website dedicated to protecting your identity and what to do if you think it's been stolen.

2. Pervasive Telephone Scams

The IRS has witnessed a huge rise in telephone scams. What happens is you receive a call from someone claiming they're from the IRS and they'll tell you either that you're entitled to a large refund or that you owe the IRS money. Don't be fooled. The objective in both cases is to steal your personal information and/or money.

Do not open emails that appear to be from the IRS, as they will never attempt to contact you by email.

Victims of this scam report being threatened with hefty fines, loss of driver's license, and even arrest.

The fraudsters perpetrating this can be quite sophisticated. They may be able to tell you the name of your employer and even your Social Security number. They've been known to use fake caller ID numbers, too, so that it appears they're calling from the IRS. And sometimes they will follow up their call with an email that looks it's from the IRS, to further convince you they're legitimate.

What is the Income Play Rich Investors Love? (Hint: It's Tax-Free)

What to do: Never disclose your Social Security number to someone who calls you. If you know you owe the IRS money, you can call them directly at 800-829-1040 to arrange payment. If you know you don't have any taxes outstanding, you can call the IRS to report a phone scam at 800-366-4484.

3. Phishing

With this particularly sneaky scam, fraudsters send you an unsolicited email that appears to be from the IRS. The email will typically contain a link directing you to a website that looks legitimate - but it's a fake. Once there, you're directed to hand over your personal and financial information.

What to do: Do not open emails that appear to be from the IRS, as they will never attempt to contact you by email (or through text message or social networks).

4. Do Not Hide Income Offshore

There are many opportunities today for people to hide income overseas. But the IRS is unequivocal. If you try to evade taxes by using such a strategy, you can face substantial penalties and even criminal prosecution.

What to do: You must declare to the IRS if you are using overseas bank accounts, brokerage accounts, or any other kinds of foreign entities. If you have one of these accounts and not disclosed it to the IRS, you should consult a tax attorney about your options.

5. False Promises of Free Money

It's common during tax time for criminals to pose as tax preparers. They attempt to lure you in with promises of big tax refunds and rebates. Often, these scammers will get the word out about their services at churches and community groups, where there is a high level of trust. They've even been known to set up fake storefronts!

What to do: Take care when choosing who prepares your taxes. The IRS holds you legally responsible for what's on your tax return. A few signs of a legitimate operator: They enter a Preparer Taxpayer ID Number, sign returns as the preparer, and provide you with a copy of your return.

6. Return Preparer Fraud

Some unscrupulous accountants claim nonexisting deductions and tax credits to fool you into thinking you have a terrific tax preparer. I met one person who raved about his accountant because he gave him $5,000 more in charitable deductions than they paid for. If and when the IRS finds out about such deceitful accountants, though, it will go back and audit every one of their clients.

What to do: Similar to the advice in No. 4, be sure to exercise good judgment when choosing a tax preparer.

7. Fake Charities

It's not uncommon for scam artists to impersonate legitimate charities and attempt to solicit money or personal information from potential victims, particularly after major disasters.

What to do: Never give away your personal information to someone who's cold-calling you seeking money. If you donate to a relief effort, do not give cash. Instead, for security and tax purposes, donate by writing a check or using a credit card.

Ed. Note: Sandy recently ran a free tax summit which detailed:

  • Tax implications of a gift or inheritance
  • Tax deductions on weekly meetings
  • How to handle the sale of a hard asset
  • Which tax software to use
  • Taxation of foreign currency exchange
  • How to avoid AMT
  • Writing off college expenses... and more!


Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved