Tax Hacks 2014: Beware These 7 Tax Scams

Photo (cc) by kewl

Nothing is certain except death, taxes, and people scared to death of taxes.

That’s part of what makes tax season ripe for con artists. They prey on fear and lurk anywhere they catch a whiff of quick money. Some even find ways to defraud taxpayers out of millions — while in prison!

In the video below, Money Talks News founder and CPA Stacy Johnson continues our series on tax hacks with a look at common tax-related schemes and scams. Check it out, then read on for more details.

Let’s take a closer look at common tax-related rip-offs.

1. Phishing

Most of us have laughed off fake emails claiming we’ve won the lotto from a foreign country or a million bucks from Microsoft. But a scary message from the IRS might be more persuasive in parting us from our personal information.

Here’s all you need to know: The IRS never contacts taxpayers by email, text message, or social media to ask for personal information. If you get an email requesting personal information purportedly from the IRS, forward it to [email protected] If you get snail mail or a phone call you’re not sure about, contact the IRS directly.

2. Fishy accountants

If you have a professional doing your taxes, make sure they’re playing by the rules. There are preparers who might suggest inflating your refund by fudging numbers or faking information, sometimes in exchange for a cut of the extra refund money. Just say no.

Remember: Whoever prepares it, you’re signing your return and you’re on the hook for what’s on it.

Back in 2011, the IRS established a program requiring tax preparers to take competency tests and continuing education courses, but that program was struck down in court last year. So for now anyone can charge money to prepare taxes, which means it’s vital to ask about background, education and credentials. Check out our recent story on how to pick a tax pro.

3. Fuzzy math

If you haven’t done it, you’ve probably been tempted: inflating charitable contributions and other deductions to minimize taxes.

People cheat on taxes for lots of reasons, from believing taxes are unconstitutional to believing everybody does it. But before you head down this slippery slope, keep in mind that some people eventually get caught.

Between October and December of last year, the IRS launched a criminal investigation of about 900 people. About 78 percent of those cases ended with somebody in prison, with sentences averaging about 3½ years.

Granted, criminal cases involve things more serious than inflating a deduction or two. Most IRS actions involve audits, penalties and adjustments, not courtrooms and prison. Still, honesty is the simplest, and best, policy.

4. Offshore income

Some people reason that money the IRS doesn’t know about is money they don’t have to pay taxes on. So they try to hide it abroad by using foreign accounts and debit or credit cards, wire transfers, international trusts, insurance plans and other vehicles.

This is considered tax evasion, and there’s a pertinent law whose acronym is suspiciously close to “FATCAT” – the Foreign Account Tax Compliance Act. Penalties for offshore tax schemes range up to 75 percent of the original tax bill in civil cases. Criminal cases may result in fines of up to $250,000 and five years in prison.

5. False forms

Some people use myriad forms to claim credits they aren’t eligible for, either through ignorance, deceit, or on the advice of an unscrupulous preparer.

One example from the IRS website: “One version of the scheme is based on the bogus theory that the federal government maintains secret accounts for its citizens and that taxpayers can gain access to funds in those accounts by issuing 1099-OID forms to their creditors, including the IRS.”

If you need help sorting out what tax forms apply to you, see if you can get some free tax advice instead of claiming something you don’t understand and risking trouble.

6. Frivolous arguments

Desperate taxpayers come up with the strangest deductions. Sometimes they get through; a stripper was once able to count breast implants as a business expense, according to this list of crazy tax deductions.

They’re funny to read, but often get rejected in court. There’s a whole section of the IRS website about failed frivolous tax arguments, including gems such as “taxes are voluntary” and “I don’t qualify as a ‘person.’”

It also has this bit on penalties:

Taxpayers who rely on frivolous arguments may also face criminal prosecution for: (1) attempting to evade or defeat tax under section 7201, a felony, for which the penalty is a fine of up to $250,000 and imprisonment for up to 5 years; or (2) making false statements on a return under section 7206(1), a felony, for which the penalty is a fine of up to $250,000 and imprisonment for up to 3 years.

There the frivolity ends.

7. Identity theft

Someone steals your Social Security number, files a tax return in your name, then cashes your refund check. It’s become a cottage industry in recent years. The IRS is responding by pulling out the big guns. From its website:

The IRS has more than 3,000 employees working on identity theft cases – more than twice the level of a year ago. We have trained more than 35,000 employees who work with taxpayers to recognize and provide assistance when identity theft occurs.

While you’re not ultimately on the hook if someone fraudulently files a return in your name, it will delay your refund if a crook has already gotten one. The way to prevent all types of identity theft is to protect your personal information, especially your Social Security number. Don’t ever carry it with you, and never provide it to anyone that doesn’t legally require it.

When it comes to your tax refund, the best thing you can do is file your return before anyone else can.

If you think you may be a victim of identity theft, call the IRS at (800) 908-4490. They’ll then take extra steps to secure your account and flag your Social Security number.

Bottom line?

If you don’t cover your assets, you can only blame yourself. The IRS certainly will.

Have you known of people who have ripped off Uncle Sam or been ripped off themselves? Share your experiences below or on our Facebook page.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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