According to the Internal Revenue Service (IRS), identified tax fraud amounted to $2.3 billion in 2020. But what goes undetected is largely left for speculation. Each year, tax scams cost governments, organizations, and citizens a thumping amount. Today, tax identity theft has become a nagging issue for many taxpayers, with potentially lasting consequences.
Who is at risk?
Anyone could become a victim of a tax scam. High-income earners could be particularly at risk. But the elaborate nature of tax fraud could target just about anyone. For example, a fraudster could steal the social security number of a child and seek employment. And once a tax ID is created, they could start making fraudulent claims.
So, it’s essential to build awareness of potential threats and protect yourself against possible tax scams. Failure to do this could lead to damaging repercussions. For instance, you could end up with financial loss, breached personal data, and even a criminal record.
Investigations into this type of fraudulent activity could go on for months and even years. And getting your name cleared of possible charges could be a strenuous process. And the emotional distress it could cause will most likely far exceed the financial costs.
Dealing with the long-term implications of tax identity theft is another challenge. Recovery could be a complex process and is never a guarantee.
Types of tax fraud and how best to tackle them
You could experience tax fraud in several ways. But some are more common than others.
1. Fraudulent tax claims
This is perhaps the most common tax scam of them all. It’s simple and straightforward. All a criminal needs are your tax-related details, and they’ll file a fraudulent claim to redirect any refunds to their accounts.
According to IPX 1031, nearly 1 in 3 taxpayers wait till the last minute to get their tax filing in order. For many people, it’s a stressful process that could take up a significant amount of time. Making an error could get you into trouble with the IRS and might even leave you with a fine.
But very few people understand that taking too long to file their returns due to procrastination or excessive worry could increase the risks of tax fraud. Criminals could make it an opportunity to quickly move in and file returns before you do. And the result? Your submission becomes a duplicate. If you’re applying online, you probably won’t even be allowed to submit your claim.
The best measure to tackle these scams is to start early. Ensure you file taxes at the beginning of the tax season, so you can beat the fraudsters and take advantage of any refunds and tax breaks available to you.
2. Phishing scams
Although phishing scams targeting taxpayers are particularly rampant around the tax season, they often continue throughout the year. And fraudsters could get remarkably inventive when impersonating the IRS.
For example, they could send you an email with a fraudulent tax transcript infected with malware. Or they might ask you to verify tax refund calculations by clicking on a malicious link. It could then take you to a spoof site that collects personally identifiable data, such as your SSN, date of birth, and electronic filing PIN. And they may even come up with fake tax agencies like the Bureau of Tax Enforcement.
These criminals could then threaten to take action if you don’t settle an IRS lien they claim is overdue. Sometimes, they could target tax preparers, too, with imposter scams. These are often designed to steal their clients’ electronic filing identification numbers (EFINs).
The point is, tax-related phishing scams are endless. Therefore, it’s important to keep yourself updated, so you’re able to identify them before you fall prey. Remember, the IRS rarely communicates with taxpayers using emails and phone calls.
Their preferred mode of communication is usually an official letter. Any requests for information or an overdue payment you receive via these modes is likely a scam. So, avoid responding, clicking on links, or downloading attachments. Always contact the IRS using their official hotline and verify the request.
3. Fraudulent tax preparers
Tax preparers are in a unique position that allows them access to a remarkable amount of tax-related client data. And a fraudulent preparer could misuse this information and file a tax claim under your tax ID or sell your information to a criminal.
So, it’s essential to hire a reputable tax preparer with a solid track record that could confirm their experience, expertise, and credibility. You can check their references if needed or seek a recommendation from a friend or colleague. It can help you minimize the risks of data theft and get your tax work done professionally without errors.
The IRS also warns against ghost preparers who do not sign on their clients’ tax returns. These tax preparers often misinform and mislead clients by promising large deductions and refunds. They then walk away with their payment, leaving the taxpayer with possible fines and even criminal charges for wrongful tax filings.
To sum up
Tax fraud continues to threaten taxpayers, not just during tax season but throughout the year. Anyone could become a victim, regardless of earnings or age. And the repercussions are often grave and could vary from financial loss and emotional distress to even a criminal record.
So, identifying these frauds and taking steps to tackle them effectively is crucial. Fake tax claims, phishing scams, and fraudulent tax preparers are the most common tax scams launched by criminals. But they could manifest in a variety of other ways, too.
Building awareness and protecting your data is essential to evade their threats. But if you suspect that you’ve become a victim, inform the IRS and the Federal Trade Commission (FTC) and seek support to minimize potential risks.