How to Avoid Tax Scams

As the saying goes, if it sounds too good to be true, then it's probably a tax scam.  Peak activity of these scams occurs around tax preparation time, but even scammers need to make their monthly mortgage payments, so you can run into one of these ploys all year long.

Avoiding Tax Scams

In this publication, we're going to discuss how to avoid tax scams, so you're better prepared to recognize one when you see it.  The IRS publishes a "Dirty Dozen" of tax scams each year.  That list includes the latest tax scams you'll encounter on the Internet.

What is a Tax Scam?

For those of you that haven't yet been introduced to the concept of a tax scam, here is a brief overview of the concept.  A tax scam is simply a trick used to separate you from your money, or a scheme aimed at intentionally defrauding the federal government.  Since these particular scams use federal income taxes as the backdrop to attract the unwitting client, they are called tax scams or income tax scams.

Avoiding a tax scam takes both knowledge and willpower.  Some individuals are overly attracted to the thought of "ripping off" the federal government, or stated more subtly, "underpaying" their fair share.  But the feds are pretty unforgiving, and ignorance is not always a successful defense in the court of law.

Various Kinds of Tax Scams to Avoid

Our list of tax scams leverages the list published by the IRS.  But we're going to take that list and break it down even further.  That's because there are really two categories of scams:  those aimed at taking your money, and those aimed at taking money from the federal government.  Not that it matters, either way you're on the losing end of these scams.

Phishing Tax Scams

The term "phishing" is just a cool way of spelling "fishing."  In this scam, the thief casts their phishing line with the bait on it, an offer that looks like it's coming from the IRS, but they are really phishing for information.  This is an identity theft scam.

The bait usually involves a tax refund, or an audit that will result in riches being returned to you.  All you need to do is supply enough information so that you can be identified, and money can be deposited into your bank account.  Only in this scam money is removed from the account, not deposited.

Most financial institutions, including the IRS, have a policy against using emails to contact individuals in these types of matters.

Tax Preparer Fraud

This tax scam involves dishonest tax return preparers that skim a portion of your refund and charge inflated income tax preparation fees.  They attract clients using offers of large tax refunds.

You are the one ultimately held accountable for the accuracy of your tax return.  That means the scammer walks away with a portion of your refund, and you wind up owing money to the IRS.  There are many large companies that have built their reputations on preparing accurate tax returns.  They probably offer the best mix of expertise and cost.

Zero Return, Zero Wages, No Gain Tax Scams

At this point, we're going to begin our discussion of tax scams that focus less on ripping-off clients and even more so on ripping-off the federal government.  This includes the zero return and zero wages tax scams.  In these two variations on the same theme, the taxpayer is encouraged to enter zero wages on their form 1040 tax return or submit an amended return showing zero wages.

In the "no gain" variation of this scam, the user simply deducts their entire adjusted gross income using Schedule A.  If you've earned wages, then there is no way to justify completing, signing, and submitting a tax return claiming you had no income.

Faulty Arguments and Tax Abatement Scams

Some other common tax scams take aim at removing money from the hands of the IRS using flawed arguments or interpretations of tax law or code.  In these two scams, the tax filer is asked to send in Form 843 (tax abatement), or claim that it's unconstitutional to pay income taxes.  It doesn't make a lot of sense for a federal agency or a politician to introduce such code or legislation; especially if the source of their budget or salary is income tax revenues.

Tax Scams Involving Assets

Right now, there are two common tax scams that involve assets.  The first entails the use of a Trust to evade income taxes.  Promises of reduced income taxes, gift taxes, and the write-off of expenses involved with setting up the trust never legally materialize.  The IRS has conducted more than 200 investigations into companies offering these types of trusts.

The final tax scam we're going to discuss involves transferring money into offshore bank accounts in the hope of avoiding paying of U.S. income taxes.  This can involve credit cards, wire transfers, trust accounts, leases, and life insurance, in addition to bank accounts.

This last example highlights perhaps the most obvious of illegal tax schemes.  A general rule of thumb applies here:  If someone uses the term "protecting income from taxes."  What they really mean is "defrauding the federal government."

Reporting Tax Fraud Activity

If you suspect you've been the victim of tax fraud, then you can report the activity to the IRS using IRS Form 3949-A, Information Referral.  A completed form needs to be mailed to:

Internal Revenue Service
Fresno, CA 93888

Persons filing this report are not required to self-identify.  However, the identity of the person filing the report can be kept confidential.  Persons reporting tax fraud may also be entitled to a monetary reward.

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