You’ve probably heard this quote attributed to Benjamin Franklin: “Nothing is certain except death and taxes.”
Wise words, but here’s another item the guy gracing our $100 bill could’ve put on the list – con artists. You’ll find them wherever there’s money to be had, and tax season offers them the opportunity for a quick score.
In the video below, Money Talks News founder and CPA Stacy Johnson continues our series on tax hacks with a look at common tax scams – including some you may have been personally tempted by. Check it out, and then read on for more.
Stacy’s been doing these stories for 20 years, and when it comes to tax rip-offs, he’s heard it all. And you can bet the IRS, which has been around since 1862, has seen everything too. So make sure you don’t fall victim to any of these…
1. Phishing. Most of us have laughed off fake emails claiming we’ve won the lotto. But a scary message from “the IRS” might be more persuasive in parting us from our personal information. Fortunately, the government is very clear: The IRS never contacts taxpayers by email or social media to ask for personal information. They already know everything they need to about you. Forward any such scams to email@example.com so they can investigate, and if you get snail mail or a phone call you’re not sure about, contact the IRS directly at (800) 908-4490 to verify.
2. Fishy accountants. If you have a pro doing your taxes, make sure he or she really is a pro – some make honest mistakes, and others make dishonest ones. There are “accountants” out there who will slyly suggest they can inflate your refund by fudging numbers or faking information in exchange for a cut of the extra refund money. The IRS requires tax preparers to take competency tests and continuing education courses, and to maintain an identification number. Ask about these things, and use of the IRS’ 10 Tips to Help Choose a Tax Preparer. Remember what Stacy said: You’re the one signing the return, so you’ll be on the hook if you choose poorly.
3. Fuzzy math. This is one self-preparers commit: low-balling withdrawals and previous credits to minimize taxes, or inflating numbers for retirement contributions, charitable contributions, deductions, and expenses. Many people cheat on taxes for various reasons, including because “taxes are unconstitutional!” or “everybody else does it.” These excuses cost the IRS billions every year, and some get away with it – for a while. But the IRS is able to cross-reference most of the numbers on your return, and many people eventually get caught. Hefty fines or jail time aren’t worth the risk.
4. Offshore income. Some people reason that money the IRS doesn’t know about is money they don’t have to pay taxes on. So they try to hide it abroad by using foreign debit and credit cards, wire transfers, international trusts, insurance plans, and other vehicles. This is considered tax evasion, and last September the IRS said, “Global tax enforcement is a top priority … the IRS and Justice Department have increased efforts involving criminal investigation of international tax evasion.”
5. False forms. Some people use the sheer number of different tax forms to try and cover their tracks, including forms to claim credits they aren’t eligible for. These may be offered by hucksters, or just accidentally claimed by self-preparers who don’t know the rules. Here’s one weird example from the IRS website: “One version of the scheme is based on the bogus theory that the federal government maintains secret accounts for its citizens and that taxpayers can gain access to funds in those accounts by issuing 1099-OID forms to their creditors, including the IRS.”
6. Frivolous arguments. Speaking of nonsense, desperate taxpayers come up with the strangest deductions. Sometimes they get through – an exotic dancer was once able to count breast implants as a business expense, according to this list of crazy tax deductions. They’re funny to read about, but they often get rejected in court. There’s a whole section of the IRS website about frivolous tax arguments, including gems such as “taxes are voluntary” and “I don’t qualify as a ‘person.’” It also has this bit on penalties: “Taxpayers who rely on frivolous arguments may also face criminal prosecution for: (1) attempting to evade or defeat tax under section 7201, a felony, for which the penalty is a fine of up to $250,000 and imprisonment for up to 5 years; or (2) making false statements on a return under section 7206(1), a felony, for which the penalty is a fine of up to $250,000 and imprisonment for up to 3 years.” Not so cute anymore, huh?
Bottom line? There are a lot of scams out there, and in fairness, taxes can get complicated. But if you don’t do the due diligence to cover your assets, you can only blame yourself – the IRS certainly will. If you need a hand, check out Tax Hacks 2012: 4 Places for Free Help.