The Devil's Dozen: IRS Recommendations for Protection Against 12 Tax Fraud Schemes

Nobody likes to pay taxes. But given the choice between paying taxes and losing money as a result of fraud, most people will prefer the first option. Unfortunately, this does not prevent thousands of Americans from giving millions of dollars to tax scammers, writes GOBankingRates. Here are the most common methods of tax fraud and methods of protection against them.

Photo: DepositphotosAccountant filling the tax

Taxes are an area where detecting fraud is difficult due to the system itself. Many Americans are unsure of their understanding of how the IRS works or how their taxes are collected, so there is ample opportunity for criminals to take advantage of these knowledge gaps.

The IRS annually produces a list called "The Devil's Dozen" detailing 12 popular tax fraud schemes. If you can spot the signs of fraud early on, it will be much easier to avoid the pitfalls that have proved costly to the victims of tax criminals.

Scheme 1. Phishing

Many people receive emails that claim to be from an official source. In fact, this is an attempt at fraud. In 2018, the IRS noted that a new pattern has emerged in this type of scam - thieves are now using stolen personal information to file fraudulent tax returns in your name, and will then impersonate the IRS or collection agency to collect funds after they are directly deposited into your account. your bank accounts.

• How to protect yourself

It's pretty simple: don't send personal information to anyone who emails you asking for it. The IRS says the service will "never initiate contact with you via email regarding an account or tax return." If the "IRS" asks you to send your annual income or Social Security number, it is definitely a fake. If you can find out who is sending this, please report it immediately. Also, be careful when entering your personal information on the sites listed in the email. Many phishing scams use fake web portals where people think they are going to an IRS website and enter personal information.

Scheme 2. Telephone Fraud

The old version of phishing used a phone, and this method still works pretty well. Fraudsters can call you and pretend to be an IRS agent or tax specialist, asking them to disclose personal information or send money, often claiming that you have an unpaid tax bill, threatening to be arrested, deported or sued. The IRS notes that there are many variations, as criminals often change tactics to succeed.

• How to protect yourself

Any time you receive an unexpected phone call, it's worth being vigilant—no matter what you're being asked to do. The IRS is careful to inform taxpayers that it will never call to request immediate payment of a bill using a specific payment method. In addition, official agents always send an invoice by mail first before contacting you by phone. Legitimate IRS agents will also never threaten to immediately call the police, demand payment without giving the taxpayer a chance to question or appeal the amount, ask for a debit or credit card number over the phone, or call about an unexpected tax refund. If someone does any of the above over the phone, it is a clear sign of fraud.

Diagram 3. Identity Theft

Although tax-related identity theft has declined in recent years—2018 cases were reported in 48, down from 710 cases in 75—many people still fall victim to dangerous scams. If a criminal gets hold of your Social Security number or Individual Taxpayer Identification Number (ITIN), they can impersonate you and file a tax return to fraudulently claim a refund.

• How to protect yourself

The first step is understanding how valuable your personal information is to scammers. The second is the need to make a lot of effort to protect it. Learn to recognize and report phishing emails, keep your security software and firewall updated regularly, use strong passwords, and encrypt sensitive files such as past tax returns that could be used to steal information. Don't carry your Social Security card unless you have a specific need for it: someone might catch a glimpse of it, or worse, you might lose it.

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Scheme 4. Fraud with the preparation of declarations

A significant portion of Americans don't do their own taxes—they rely on professionals. And although most of these experts do honest work for fair pay, there are also those who abuse their trust. The person preparing your tax documents should be prepared to answer all questions about your finances. Otherwise, it could be a scammer who is able to involve your data in a criminal scheme.

• How to protect yourself

Do not be shy to ask questions to your tax assistant, ask him for details that can confirm that he is really professionally involved in your taxes. Ask this person if they have an IRS tax identification number (PTIN). Paid compilers must register with the IRS, so they will need a PTIN to be included in the reports. It is worth paying attention to those about whom there is little available information. Use resources such as the Better Business Bureau or State Board of Accountancy to conduct a proper review before handing any documents to a person.

If your professional performs multiple financial tasks for you—for example, he or she is an accountant and/or CPA—be sure to request a final detailed list of your data, financial statements, and other documents. This will help you find any suspicious expenses or charges that you weren't expecting.

Scheme 5. Fake Charities

There are people who are not stopped by charitable goals - criminals often take advantage of others' generosity to their advantage. By luring you in with a reputable cause and the promise of tax refunds, fake charities will convince you to hand over the money and then try to claim it on your taxes in April. Or, if you're really unlucky, they may even use their sites as a means to steal personal information that they will use to commit other types of fraud or steal your identity.

• How to protect yourself

IRS offers a search function called Exempt Organizations Select Checkto determine if a charity is legal or not, so you can run any group through it to validate. It is also worth asking for an employer identification number (EIN), which any real organization should provide without any problems. Pay attention to such signs: the group uses a name very reminiscent of the name of a well-known organization, imitates the appearance of its website and symbolism. Never send cash by mail or share your credit card information with someone who contacts you to request a donation.

Scheme 6. Overstated tax return expectations

A lot of dubious tax assistants and just criminals posing as accountants may try to lure you into claiming that they are able to provide huge amounts in the form of tax refunds. After they convince you to accept their services, they will deceive you and make false applications for benefits or loans, may file a fake return or steal your real tax refund.

• How to protect yourself

This type of scam often targets groups of people who are not required to file taxes—elderly or low-income people. Therefore, if you are in this group, be especially wary if someone promises you large refunds. Either way, remember, if something sounds too good to be true, it's probably a scam. If your "helper" promises a refund that is much higher than what you would normally receive, he is either trying to get you interested in his services, or is intent on breaking the law to get data or money. Do not turn to unverified persons for tax help.

Figure 7. Unacceptable Business Loans

Scammers posing as tax preparers may persuade you to submit ineligible applications for business loans that you are not actually eligible for. This may all look great, but you will usually end up paying a large fine for improperly obtaining credit while your “helper” disappears with the huge fee he charged you.

• How to protect yourself

The IRS singles out two credits—the research credit and the fuel tax credit—as particularly common in these scams. Both are legal tax benefits that you can receive, but they have a number of specific criteria that the taxpayer must meet. If your "helper" is pushing you to take out these loans, this could be a serious signal to run away. Research what each type of loan requires—not to mention the credentials of your “assistant.” If you do not qualify, report the person to the IRS.

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Diagram 8. Wrong deductions

Adding to your legal deductions from the tax return those for which you are not entitled can result in major troubles, which may include fines of up to 20% of the deduction amount, as well as a fine of $ 5000 if the IRS finds that you filed a “frivolous” refund , and / or 75% of the amount owed if you decide to show that you were underpaid.

• How to protect yourself

This error is a little easier to avoid than most others, since the issue is under your control if you are preparing a tax return yourself. Carefully read all the requirements for any deduction before you make it. Consider filing your return through one of the many tax preparation software options. There are many free options. If there is a big discrepancy between what, according to the program, you can deduct, and what your tax assistant does in this direction, before applying, be sure to ask for an explanation.

Scheme 9. Falsification of income for loans

Although this seems counterintuitive, in some cases, trying to pretend that you have made more money than you really can help you get a higher tax refund in certain situations. Namely, large refundable taxes, such as income tax, can bring a greater return on large earnings.

• How to protect yourself

It's not hard to avoid falsifying your own income, but it's worth noting that scammers sometimes try to defraud law-abiding taxpayers in these situations. The most common method involves a fraudulent Form 1099-MISC, which is purportedly issued by a major financial company, such as a bank or mortgage company, with which the taxpayer already does business, and may often include a fraudulent Form 56 - Notice Concerning Fiduciary Relationship. If someone offers you a way to make quick money using these two forms, be careful.

Figure 10. Frivolous Tax Arguments

No, this is not a description of the 15 minutes you and your co-workers spent fighting over whether to use blue or black pen to fill out Form 1040. This is an attempt to avoid paying a legitimate tax bill by making flawed legal arguments. Although you have the right to legally challenge any tax liability, you may encounter people who propose to make “unreasonable and frivolous claims,” which can result in significant tax penalties.

• How to protect yourself

There is a reason why taxes are listed along with death as two inevitabilities for any person. Anyone who insists on their “sure-fire” way to help you get rid of your taxes through the courts is probably not acting in your best interest. Especially if this offer involves a fee. There are almost no circumstances in which you can avoid taxes, but if in doubt, get advice from a CPA or attorney before filing anything.

On the subject: Key IRS issues taxpayers will face in 2020

Scheme 11. “Tax havens”

There are many ways to legally hide income that may not need to be legal. There are also many illegal ways to create tax shelters, particularly by using Section 831(b) of the Internal Revenue Code to create a “shelter” that pretends to be an insurance company. Although complex, insurance tax havens provide a way for legitimate insurance companies to manage risk without counting premiums as income. But this structure can be exploited by essentially forging insurance policies with inflated premiums to take advantage of a tax loophole.

• How to protect yourself

If your accountant describes a tax avoidance process that either involves setting up a small insurance company solely to avoid paying the required amount, or your insurer does not have the data to help you gather more information, proceed with extreme caution. This can be especially important if you own your own business, so be sure to check exactly what your “assistant” is doing on your behalf.

Scheme 12. Offshore

Using unregistered accounts in other countries to hide money from the IRS is illegal, although quite common among the richest Americans. In fact, the Offshore Voluntary Disclosure Program, which opened in 2009 and ended in September 2019, raised more than $ 11 billion from over 50 disclosures of such cases. However, breaking the law is no excuse just because many others do it.

• How to protect yourself

Most likely, if you do this, it is voluntary. In this case, stop. However, this does not mean that your accountant - or accounting department - can play by loose rules. So make sure you have at least a basic understanding of what they do with your money overseas. There are legal ways to keep money overseas, but if the IRS doesn't know about those accounts, you're likely breaking the law.

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