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Tax Scams — The Top 5 to Avoid in 2016

Don't fall victim to one of these tax scams preying upon unsuspecting targets

By Josh Enomoto, InvestorPlace Contributor

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It’s that time of the year again! If you haven’t already noticed from the mass proliferation of advertising — perhaps most notably by Anthony Hopkins in a Super Bowl commercial — tax season is upon us.

tax scamsFor many Americans, that means rummaging through endless documents to claim whatever money-saving deductions that are legally available. Others actually look forward to Uncle Sam’s annual tithing ritual, anticipating instead a fat refund check by the U.S. Department of the Treasury. Whatever the case, tax season involves money, and that brings out a darker underbelly — consumer tax scams.

Arguably, no other white-collar crime is as pervasive and vicious as tax scams. According to a report last year by CNBC, tax scams specifically involving refund check fraud was forecast to hit $21 billion in 2016 — this would turn out to be a colossal 223% jump from two years prior. All that is needed to perpetuate such a tax scam are a name, a date of birth and a social security number. Worse yet, the Internal Revenue Service is ill-equipped to handle these fraudulent claims, primarily due to legal technicalities and timing issues.

But it’s more than just the raw numbers. Unlike other frauds which are relatively easy to detect — a Nigerian prince, you say? — tax scams speak to an intractable need. Typically, as we grow older, our responsibilities and assets increase as well. Being the philanthropist that he is, Uncle Sam wants his fair share, and that means paper work — lots of it. Just looking at the mound of documentation is enough to cause brain freeze, driving most people into the arms of tax advisory services.

Of course, a vast majority of financial services are legitimate organizations. However, the rise of consumer tax scams is a worrying trend, and there is no more critical time to be vigilant than right now. Here are the top five tax scams you must avoid in 2016.

Tax Scams: Exaggerated Refunds

Let’s face it — the only incentive for most of us going through the rigors of preparing our taxes is the anticipation of the refund check. It feels like a long-forgotten bonus, a sort of reward by the federal government for the hard work you put in over the past year. It goes without saying that there’s a natural incentive to get the most refund possible, and therein lies the catalyst for one of the hardest-to-detect tax scams circling the waters.

Here’s how the fraud works — unscrupulous entities will hawk promises of exaggerated refunds in exchange for a percentage of the refund amount. Numbers can be worked around, and deductions could be increased, or even fabricated altogether. The problem is that your name is attached to your refund, and if the IRS suspects any fraudulent activity, you are the immediate focus of an audit.

The IRS doesn’t mess around. If you are caught in a tax scam, you may be held liable not only for the principle amount of damages, but also for any interest that accrued during the time spent by the IRS investigating your case. What initially was a small profit could easily become a net liability, causing a thinner wallet and unnecessary headaches.

The best way to avoid the refund tax scam is simple — always seek the counsel of trusted licensed tax professionals. In the age of the internet, this should be an easy task. Remember: It’s your name and your reputation. Don’t cheapen it for the sake of a few dollars.

Tax Scams: The Phone Call

We all live busy lives. Under the constant demands and sometimes unexpected emergencies revolving around work and family, the usual method of communication from the IRS — post mail — seems extraordinarily archaic. Thus, the convenience of receiving a phone call to update us on crucial taxation matters seems like a given. But beware — that phone call from Uncle Sam might just be a tax scam!

This carefully crafted fraud invokes the fear of an IRS audit. A federal agent impersonator calls the victim to warn him or her about an unpaid liability, with severe consequences awaiting if the matter is not resolved immediately. Among common tax scams, this particular variant is likely to target individuals with foreign-sounding names, possibly under the assumption that people unskilled in the English language are easier to intimidate.

Here’s the deal — no matter how bad of a reputation the IRS has, they are still a branch of the U.S. government. Thus, protocol and a certain standard of decorum must be obeyed. By their own words, the IRS will never harass taxpayers demanding immediate restitution, and no contact via phone will be made until an initial notification has been sent through the post office.

What do you do if you receive the phone call? Hang up. It’s just that simple.

Tax Scams: Frivolous Arguments

Tax scams don’t necessarily have to involve a nefarious agent on the other end of the line. In some cases, they can involve the spreading of (really) bad information. Usually, distorted information turns into interesting, but relatively innocuous conspiracy theories. But when it comes to the tax man, don’t push your luck! Many individuals, most notably the affluent, have fallen prey to ghastly advice — just ask Wesley Snipes.

Outlandish statements or esoteric reasoning used to justify tax avoidance are regarded as frivolous arguments. A popular example circulating the internet for some time is sovereignty exclusion. According to this theory, the U.S. as a legal entity only comprises the District of Columbia and federal territories. Individual states are sovereign, and therefore, their residents are not obligated to pay federal taxes.

It sounds convincing to those who are not especially privy to the fine print of constitutional law. And there are many frivolous tax scams that appear reasonable and logical. But here’s the bottom line — the IRS doesn’t give a hoot. Uncle Sam has won virtually every frivolous case, and the chances that you could pull a quick one are minimal at best.

It’s also a $5,000 penalty for failing to file a return on the basis of a frivolous argument. That, and the legal fees associated with challenging the IRS make it an uneconomical proposition. The best advice to avoid this tax scam is to leave the conspiracy theories for YouTube.

Tax Scams: Phishing For Returns

In the push for a digitalized society, identity theft exploded as a big business for criminal cartels. In 2014, consumers lost $16 billion to identity fraud, and the trend is only growing. Of particular concern to those wanting to avoid the latest round of tax scams is phishing, or the use of unsolicited emails often purporting to be from a trusted source to extract valuable personal information.

In this tax scam, the victim receives an email from the IRS. Everything looks legitimate on the surface, with fine details such as an official logo, an 800-phone number, and even an accurate domain name listed on the email. Upon establishing a basis of trust, the communication may include keywords to entice engagement, such as “unclaimed tax refunds.”

As with all phishing attempts, the best tactic is to avoid any kind of engagement with the email. In addition to identity theft, there is an increased risk of computer virus infection or other types of malware. Forwarding a phishing tax scam to [email protected] will help the IRS combat this growing criminal problem. Also be aware that digital frauds are becoming increasingly complex, and that all information — no matter how legitimate it appears — listed on a phishing email should be regarded as harmful.

The IRS is very clear about its digital communication policy — the agency never sends unsolicited emails regarding your personal data.

Tax Scams: Abusive Tax Shelters

It’s a reasonable assumption that most everyone wants to reduce their tax liability — less reported income naturally equates to less money owed to the IRS. Most people go about this process through perfectly legitimate means, commonly through real estate ownership and other tax-deductible assets. But even the most straight-laced individuals can sometimes fall prey to the allure of the abusive tax shelter, or the rich person’s tax scam.

By definition, tax shelters are investments or strategies that can be deployed to receive favorable tax treatment. As an example, incurring a capital loss on an underperforming stock on Dec. 31 is much more advantageous than performing the identical task a day later. But an abusive tax shelter pushes the boundaries of taxation laws by attempting to mask illegal behavior with a series of legal ones.

Among the litany of tax scams, this is one of the most structurally complicated, frustrating IRS investigators to no end. Abusive tax shelters often involve the creation of corporate entities and offshore accounts designed to obfuscate financial paper trails and to hide the source of an income stream. The potential combination of domestic and international tax laws provides plenty of cover for what is essentially a convoluted tax scam.

The scheme often involves dubious marketing strategies, allowing tax scammers to solicit their “services” to the unsuspecting affluent who have a pronounced interest in lessening their liabilities. However, the consequences can be severe. In addition to civil liabilities, those engaged in a sheltering tax scam can face criminal conspiracy charges, as the KPMG scandal of a decade ago demonstrated. For the sake of saving some money, one risks their wealth, their reputation, and their freedom — it’s simply not worth it.

The IRS gives the best advice for abusive tax shelters: if it sounds too good to be true, it probably is.

Josh Enomoto is not a licensed tax professional and this article should not be considered as tax advice.


Article printed from InvestorPlace Media, https://investorplace.com/2016/02/tax-scams-top-5-to-avoid-2016/.

©2018 InvestorPlace Media, LLC