Each year, the IRS releases a list of the 12 most common scams that taxpayers may encounter during tax season. Here’s a run-down of the top scams of 2014 and how you can protect yourself.
1. Identity theft
How it works: Someone gets ahold of your personal information—such as your social security number—and commits fraud in your name. They may even file a tax return in your name to get a refund.
How you can protect yourself: Keep your info private by using encrypted passwords online and shredding personal paperwork when you no longer need it. If you think your identity has been stolen, contact the IRS Identity Protection Specialized Unit at 800-908-4490.
2. Telephone scams
How it works: Callers pretend to be from the IRS in order to steal money and personal information. They often say that you owe money and may be arrested if you don’t pay.
How you can protect yourself: If anyone calls and says they are from the IRS, tell them you’ll call them back. Then dial the IRS at 800-829-1040 to see if you really do need to settle a payment.
How it works: An unsolicited email that appears to be from the IRS prompts you to give personal information.
How you can protect yourself: Know that the IRS will never email you to ask for personal information. Don’t reply to the email—forward it to email@example.com to report it instead.
4. Fake tax preparers promising “huge refunds”
How it works: Scam artists pretend to be legitimate tax professionals and promise huge refunds—most of which are based on fake information or illegal tactics.
How you can protect yourself: Make sure your tax preparer is qualified and has a history of satisfied customers (tip: check Angie’s List for reviews). Always get copies of your tax return signed by the preparer, and know that an honest tax professional will never deduct a “fee” from your refund before giving it to you.
5. Fake tax preparers stealing personal information
How it works: Much like above, scam artists pose as tax advisers and use your financial information to steal your identity.
How you can protect yourself: Do your research before hiring someone to do your taxes—are they qualified, experienced, and recommended? Make sure they sign the return and enter their IRS Preparer Tax Identification Number.
6. Hiding income in offshore accounts
How it works: Individuals establish offshore accounts in order to avoid taxes; the money is generally accessed via debit cards or wire transfers.
How you can protect yourself: If you have legitimate reasons to hold money abroad, make sure you are complying with all federal reporting requirements. If you don’t have a legitimate reason—don’t even think about it.
7. Impersonating charities
How it works: Con artists pose as representatives from a charitable organization in order to solicit donations and personal information.
How you can protect yourself: Don’t give out credit card numbers, social security numbers, or other personal information to charities seeking donations. Contribute by check so there is a record of your gift.
8. Reporting false income
How it works: Individuals claim more income than they earned in order to maximize refundable credits.
How you can protect yourself: Be exact with your record-keeping and honest with your tax reports. Tax fraud is never worth the penalty, which comes with hefty fines.
9. Frivolous tax arguments
How it works: Taxpayers attempt to make outlandish claims to avoid paying their taxes.
How you can protect yourself: Bear in mind the futility of this endeavor—most frivolous arguments are thrown out in court. In addition, both taxpayers and tax preparers can face criminal charges for attempting to evade tax laws. If your tax professional suggests making what sounds like an unreasonable claim, go with your gut and say no.
10. Falsely claiming zero wages or falsifying tax documents
How it works: Submitting phony 1099s or other forms reduces income to zero, thereby wiping out taxes due.
How you can protect yourself: If anyone suggests you file a 1099-OID or other false documents to avoid taxes or collect a larger refund, refuse. You’re the one responsible for your tax statement, even if someone else prepares it—and if you’re caught falsifying information, you could be hit with a $5,000 fine.
11. Abusive tax structures
How it works: Abusive Tax Schemes violate IRS laws by using multi-layered transactions to conceal financial information.
How you can protect yourself: Avoid preparers who promise to “eliminate” your tax liability.
12. Misuse of trusts
How it works: Individuals funnel assets into trusts for the sole purpose of reducing taxable income or avoiding estate transfer taxes.
How you can protect yourself: Establish a relationship with a trusted tax professional before setting up a trust arrangement—and familiarize yourself with the rules around legitimate uses of trusts.