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How to avoid getting scammed come tax time

  • Tax scams come in two major varieties: ID theft, whereby criminals file fraudulent tax returns, and tax scams, where callers convince victims they owe taxes and collect payment information.
  • Fraudulent tax returns usually cost taxpayer victims only time lost, whereas money paid to scammers posing as IRS agents is most often gone for good.
  • The IRS communicates with taxpayers only through the mail, and never via text, phone call, email or other communications medium.
Mark Henricks, special to CNBC.com

Published 8:59 AM ET Mon, 23 Oct 2017

Income tax collections generated more than $3.3 trillion for the federal government in 2015, according to latest Internal Revenue Service figures. Along with that money, tax season also produces tens of thousands of tax rip-offs that cost individual taxpayers and the IRS much time and many millions of dollars.

Tax rip-offs come in two main types. Identity theft involves obtaining enough information about a taxpayer to file a fraudulent tax return and then collecting a refund. In the other variety, a scammer impersonating an IRS official contacts an unwitting taxpayer and tricks the victim into handing over money.

Scammers claiming to be from the IRS may ask for debit or gift card information for payment.

Alexandra Iakovleva | Getty Images
Scammers claiming to be from the IRS may ask for debit or gift card information for payment.

A taxpayer whose identity has been used to file a fraudulent return may be significantly inconvenienced. For example, his or her legitimate refund may be delayed nine months or more, rather than the customary three weeks or less, once a scammer has filed a false return using that taxpayer’s information.

However, identify theft fraud is unlikely to cost an individual taxpayer any actual money. The government, not the taxpayer, bears the cost of fraudulently obtained refunds.

Tax scams, on the other hand, result in direct financial losses to victims. When a taxpayer gives funds to scammers impersonating an IRS agent, the money is lost.

Frequency of tax stings

Of the two types of tax rip-offs, identity theft is more common. From late January to early March 2017, the IRS identified 14,068 fraudulent returns involving identity theft, the Treasury Inspector General for Tax Administration (TIGTA) said in its April interim report on 2017 collections. The final report is due in September 2017.

Impersonation scams were somewhat less common. From October 2013 through June 2017, TIGTA reported 10,911 cases of someone impersonating an IRS agent. TIGTA didn’t supply a dollar value for the costs of fraudulent returns, but says taxpayers lost $57,963,603 to impersonation scams during that period.

How to avoid being scammed

Fending off tax scammers is often easy, according to experts. Swindlers impersonating IRS agents typically phone victims, tell the taxpayer that he or she owes the IRS and threaten legal action unless payment is made immediately.

Neil Becourtney, an Eatontown, New Jersey-based CPA with New York accounting firm CohnReznick, says clients have contacted him after calls from scammers impersonating IRS agents.

They say you have a balance and if it’s not paid we’re going to lock you up,” Becourtney said. “They ask for gift cards, debit cards or money orders.

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“They’ll sometimes ask for your bank information so they can transfer funds out of your bank account.”

Scammers may trick caller ID to show a call as coming from IRS, offer badge numbers and otherwise convincingly portray IRS agents. However, no matter how persuasive the message, if it comes by phone it’s a scammer, according to the IRS.

“Our normal correspondence is a letter in the mail,” said IRS spokesman Raphael Tulino. “It’s not a random threatening phone call.” Nor, according to a July 2017 IRS scam alert, will agents contact taxpayers by email, text message, fax, social media or a knock on the door, all of which have been used by scammers to set up their victims.

Fending off identity fraud

Identity theft fraud can be harder to defend. Identity thieves often operate by sending taxpayers so-called “phishing” emails or text messages purporting to be from the IRS and containing links that, if clicked, will transmit identity details to criminals.

“Phishing emails are designed to look like legitimate emails from the IRS or other financial institutions, but are actually from a cybercriminal looking to steal your personal information,” said Gary Davis, chief consumer security evangelist for cybersecurity firm McAfee. “If you suspect an email is a phishing email do not click any of the links in the email, and instead go directly to the purported source’s website.”

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But even ignoring every suspicious email may not be enough. “A new scam in tax season 2017 involved an IRS impersonator calling individuals to verify tax return information over the phone,” said Nathan Rigney, tax research analyst at H&R Block’s Tax Institute.

“The scammer claims to have the taxpayer’s return, but needs to verify the taxpayer’s identity to ensure the return was not fraudulent,” Rigney said. “The scammer goes on to ask for the taxpayer’s Social Security number or even bank account information.”

Rigney says a caller who asks for personal information is likely not from the IRS. “The IRS will never seek to verify a taxpayer’s identity by seeking personal information over the phone or through email,” he said.

Other ways fraudsters steal IDs

In order to file a fraudulent return, however, a criminal needs only a taxpayer’s name, birth date and Social Security number. And a scammer may get these without contacting a taxpayer, such as from a data breach at another organization.

There are many ways to get a Social Security number, name and date of birth,” said Paige Hanson, identity education lead for cybersecurity firm Symantec. “And those are the things the fraudsters are using.”

A taxpayer’s most effective way to keep anyone from filing a fraudulent return in his or her name may be to file as early as possible, Hanson says.

“The bottom line is that under no circumstances will the IRS initiate contact out of the blue asking you to click on a link.”-Raphael Tulino, IRS spokesman

Tax preparers say the first sign of a fraud is often when IRS rejects a return because a return with the same information has already been received. Even if a taxpayer’s information has been compromised, if he or she files first, the false return will be the one rejected.

Hanson also suggests being vigilant about junk mail. A sudden decrease in unsolicited commercial mail, especially around the January start of tax season, could mean someone has stolen identity information and is diverting mail to collect W-2s and other tax documents to facilitate a fraudulent return, she says.

To avoid most tax scams, however, all that’s necessary is to ignore any message purporting to be from the IRS unless it’s a letter.

“The bottom line is that under no circumstances will the IRS initiate contact out of the blue asking you to click on a link,” said Tulino of the IRS. “Nor are we contacting anyone with a threat of a lawsuit demanding immediate payment. That’s a scammer.”

— By Mark Henricks, special to CNBC.com

How to Make the Tax Code Work for You

In 2014, 150 million taxpayers dutifully filed their federal income tax returns.¹ And all of them made decisions about deductions and credits—whether they knew it or not.

When you take the time to learn more about how it works, you may be able to put the tax code to work for you. A good place to start is with two important tax concepts: credits and deductions.²

Credits

As tax credits are usually subtracted dollar for dollar from the actual tax liability, they potentially have greater leverage in reducing your tax burden than deductions. Tax credits typically have phase-out limits, so consider consulting a legal or tax professionals for specific information regarding your individual situation.

Here are a few tax credits that you may be eligible for:

  • The Child Tax Credit is a federal tax credit for families with dependent children under age 17. The maximum credit is $1,000 per qualifying child.³
  • The American Opportunity Credit provides a tax credit of up to $2,500 per eligible student for tuition costs for four years of post-high-school education.⁴
  • Those who have to pay someone to care for a child (under 13) or other dependent may be able to claim a tax credit for those qualifying expenses. The Child and Dependent Care Credit provides up to $3,000 for one qualifying individual, or up to $6,000 for two or more qualifying individuals.⁵

Fast Fact: The mortgage interest deduction is not the biggest deduction in terms of its cost to federal coffers. It’s actually third, behind the exclusion for work-based health insurance and the reduced tax rate on capital gains and dividends.
Source: Joint Committee on Taxation, 2014.

Deductions

Deductions are subtracted from your income before your taxes are calculated, and thus may reduce the amount of money on which you are taxed and, by extension, your eventual tax liability. Like tax credits, deductions typically have phase-out limits, so consider consulting a legal or tax professionals for specific information regarding your individual situation.

Here are a few examples of deductions.

  • Under certain limitations, contributions made to qualifying charitable organizations are deductible. In addition to cash contributions, you potentially can deduct the fair market value of any property you donate. And you may be able to write off out-of-pocket costs incurred while doing work for a charity.⁶
  • If certain qualifications are met, you may be able to deduct the mortgage interest you pay on a loan secured for your primary residence. This deduction can include interest on a mortgage, a second mortgage, a home equity line of credit, or a home equity loan.⁷
  • Amounts set aside for retirement through a qualified retirement plan, such as an Individual Retirement Account, may be deducted. The contribution limit is $5,500, and if you are age 50 or older, the limit is $6,500.⁸
  • You may be able to deduct the amount of your medical and dental expenses that exceeds 10 percent of your adjusted gross income, or 7.5 percent if either you or your spouse is age 65 or older.⁹

Understanding credits and deductions is a critical building block to making the tax code work for you. But remember, the information in this article is not intended as tax or legal advice. And it may not be used for the purpose of avoiding any federal tax penalties.

  1. Internal Revenue Statistics, 2015. End-of-year filing season statistics.
  2. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
  3. Internal Revenue Service, 2015
  4. Internal Revenue Service, 2015
  5. Internal Revenue Service, 2015
  6. Internal Revenue Service, 2015
  7. Internal Revenue Service, 2015
  8. Withdrawals from traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.
  9. Internal Revenue Service, 2015