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The Devil's Dozen: IRS recommendations on 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 fraud is difficult to detect because of the system itself. Many Americans are unsure of their understanding of how the United States Internal Revenue Service (IRS) works or how its taxes are levied, so criminals have ample opportunity to exploit these knowledge gaps.

The IRS annually compiles a list called The Devil's Dozen with a detailed description of 12 popular tax fraud schemes. If you can detect signs of fraud at an early stage, it will be much easier to avoid the pitfalls that cost victims of tax criminals at one time.

Scheme 1. Phishing

Many receive emails stating that they were sent from an official source. In fact, this is an attempt to fraud. In 2018, the IRS noted that a new scheme appeared in this type of fraud - now thieves use the stolen personal information to file fraudulent tax returns on your behalf, and then will impersonate the IRS or a collection agency to receive funds after they are directly credited to your bank accounts.

  • How to protect yourself

It's quite simple: do not send personal information to those who send you an email asking for it. According to IRS representatives, the service "will never initiate contact with you by e-mail regarding an invoice or tax return." If the IRS asks you to send your annual income data or social security number, this is definitely a fake. If you can find out who sends this, report immediately. Also, be careful when entering your personal information on the sites indicated in the email. Many phishing scammers use fake web portals: people think that they get to the IRS website and enter their personal data.

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

Each time you receive a sudden phone call, you should be vigilant - no matter what you are asked. The IRS carefully informs taxpayers that service representatives will never call to request immediate payment of the bill using a specific payment method. In addition, official agents always first send an invoice by mail before contacting you by telephone. Legitimate IRS agents will also never threaten to call the police immediately, demand a payment, preventing the taxpayer from questioning or appealing the amount, will not ask for a debit or credit card number by phone or call for an unexpected tax refund. If someone on the phone does any of the above, this is a clear sign of fraud.

Diagram 3. Identity Theft

Despite the fact that in recent years the number of tax-related thefts of personal data has decreased - 2018 cases were registered in 48 compared to 710 cases in 75 - many people are still victims of dangerous fraud. If a criminal takes possession of your social security number or personal tax identification number (ITIN), he may pretend to be you and file a tax return to fraudulently request a refund.

  • How to protect yourself

The first step is to understand how valuable your personal information is to scammers. The second is the need to make a lot of efforts to protect her. Learn to recognize and report phishing emails, keep your security software and firewall up to date, use strong passwords, and encrypt sensitive files such as tax returns from years past that could be used to steal information. Do not carry a social security card with you unless you have a special need for it: someone may catch a glimpse of it or, even worse, you may lose it.

On the subject: 6 ways to get free tax filing assistance

Scheme 4. Fraud with the preparation of declarations

A significant part of Americans do not engage in their own taxes - they rely on specialists. And while most of these experts do honest work for fair pay, there are those who abuse trust. The person preparing your tax documents should be ready to answer all questions about your finances. Otherwise, it may 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 specialist performs several financial tasks for you - for example, he is an accountant and / or CPA, do not forget 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 did not expect.

Scheme 5. Fake Charities

There are people who are not stopped by charity - criminals often use someone else's generosity in their interests. Luring you to a worthy cause and promise of tax returns, fake charities will convince you to give the money back and then try to claim it from your taxes in April. Or, if you're really unlucky, they can even use their sites as a means of stealing personal information that they will use to commit other types of fraud or identity theft.

  • 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 fraud is often aimed at groups of people who are not required to file tax returns - the elderly or low-income people. Therefore, if you are in this group, be especially careful if someone promises you large refunds. In any case, remember that if something sounds too good to be true - it is most likely a hoax. If your “assistant” promises a reimbursement that far exceeds what you usually get, he either tries to interest you in his services, or intends to break the law in order to receive data or money. Do not contact unverified persons for tax assistance.

Figure 7. Unacceptable Business Loans

Fraudsters who pretend to be tax inspectors may convince you to submit inappropriate applications for business loans, for which you actually have no right. All this may look great, but, as a rule, in the end you will pay a large fine for improperly obtaining a loan, while your “assistant” will disappear with the huge commission that he took from you.

  • How to protect yourself

The IRS provides two loans - a loan for research and a tax credit for fuel - as especially common in these fraudulent schemes. Both are legitimate tax benefits you can get, but they have a number of specific criteria that a taxpayer must meet. If your “assistant” pushes you to get these loans, this can be a serious signal to flee. Examine what is required for each type of loan — not to mention the powers of your “assistant”. If you do not meet the requirements, report this person to the IRS.

On the subject: Gambling losses, repairs, insurance: what can be deducted from taxes for 2019

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 is easy to avoid falsifying your own income, but it is worth noting that fraudsters sometimes try to trick law-abiding taxpayers in these situations. The most common method involves a fake 1099-MISC income statement form, which is supposedly issued by a large financial company, such as a bank or a mortgage company with which the taxpayer is already dealing, and often may include a fake form 56 - Notice Concerning Fiduciary Relationship. If someone offers you a way to make money quickly on these two forms, be careful.

Figure 10. Frivolous Tax Arguments

No, this is not a description of the 15 minutes that you and your colleagues spent fighting to use a blue or black pen to fill out form 1040. This is an attempt to avoid paying a legitimate tax bill by making erroneous legal arguments. Although you have the right to legal appeal of any tax liability, you may run into people who offer to make “unreasonable and frivolous claims,” which can lead to significant tax penalties.

  • How to protect yourself

There is a reason that taxes are indicated along with death as two factors of inevitability for any person. Anyone who insists on their “reliable” way of helping you get rid of taxes through the court is probably not 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, consult a CPA or an attorney before submitting anything.

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

Scheme 11. “Tax havens”

There are many ways to legitimately harbor income that may not be legal. There are also many illegal ways to create “tax havens,” in particular by using section 831 (b) of the Tax Code to create a “shelter,” which claims to be an insurance company. Although this is difficult, insurance “tax havens” provide legitimate insurance companies with a way to manage risk, not counting premiums as income. But this structure can be used, in fact, forging insurance policies with inflated premiums to take advantage of a tax loophole.

  • How to protect yourself

If your accountant describes the process of tax evasion, or involves the creation of a small insurance company solely to avoid paying the required amount, or your insurer does not have data that will help you collect more information, proceed with extreme caution. This can be especially important if you own your own business, so make sure what exactly your “assistant” does 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, then voluntarily. In this case, stop. However, this does not mean that your accountant - or bookkeeping - can play by the free rules. So make sure you have at least a basic understanding of what they are doing with your money abroad. There are legal ways to keep money abroad, but if the IRS does not know about these accounts, you are probably breaking the law.

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