As digital communication becomes increasingly commonplace, new tax scams are emerging at an alarming rate. In fact, more than 75,000 victims have lost $28 million to scammers impersonating the IRS since 2018, according to data from the Federal Trade Commission.
Unfortunately, these scams pose significant threats to the personal data and financial security of U.S. taxpayers who don’t know how to spot them.
Although the risk of falling victim to IRS impersonators and other tax-related scams increases during tax season, scammers can target taxpayers any time of year. Thus, recognizing certain red flags is the first line of defense when it comes to protecting your identity, credit, and financial well-being.
Recognizing Common Tax Scams
Each year, the IRS releases its “Dirty Dozen” list of tax scams. In 2023, false tax credit claims, cybercrimes, and scams targeting high earners topped the list.
While these scams can affect taxpayers at any time, they tend to peak in the days and weeks leading up to Tax Day. Here are some of the most common tax scams of late and their defining characteristics:
#1: False Tax Credit Claims
The U.S. tax code is continually in flux. As such, it’s not unusual for Congress to introduce new (and sometimes murky) tax credits that incentivize taxpayers to take certain actions throughout the year.
Although claiming these tax credits can be valuable in some cases, doing so erroneously can raise a red flag with the IRS. That’s why it’s important for taxpayers to educate themselves or work with a credible tax expert to avoid scams involving false tax credit claims.
In 2023, many scammers falsely promoted the Employee Retention Credit (ERC) and fuel tax credit to taxpayers. The ERC is a refundable tax credit available to businesses who kept their employees on the payroll while shut down due to the Covid-19 pandemic, while the fuel tax credit is meant for off-highway business and farming use.
This year, scammers promoted refunds related to the ERC via radio and internet ads to con ineligible taxpayers into claiming the credit. They collected personal information from these taxpayers in exchange for false refund promises, which they could then use to steal their identities.
Additionally, many dishonest tax preparers convinced taxpayers to inflate their tax refunds this year by incorrectly claiming the fuel tax credit. Since this credit isn’t available to most taxpayers, the IRS can easily spot such erroneous claims.
#2: Phishing, Smishing, and Other Online Scams
Online scammers often pose as legitimate financial institutions and tax organizations, including the IRS and state revenue departments. They send fake communications in the form of unsolicited emails (phishing) and texts (smishing) to trick victims into providing confidential personal and financial information.
Current online scams involve criminals posing as third parties offering to help taxpayers create an Online Account at IRS.gov. Scammers also use this tactic to steal personal information from their unsuspecting victims.
In addition, social media is becoming an increasingly popular medium to promote certain tax scams and misleading information. Recently, the IRS has seen a surge in social media scams encouraging people to submit false information via Form W-2 or Form 8944 in hopes of getting a larger refund.
#3: Tax Scams Targeting High Earners
Unsurprisingly, there are a variety of tax scams that specifically target the highest earning U.S. taxpayers. In 2023, these scams involved fake charities, phony tax avoidance strategies, and certain international schemes.
According to the IRS, fake charities are a perpetual issue that becomes increasingly problematic whenever a crisis or natural disaster strikes. Scammers take advantage of taxpayers’ generosity by setting up bogus charitable organizations to collect money and valuable personal details from their victims.
These scams can be particularly alluring since many taxpayers who itemize deductions and donate to charity can claim a deduction on their federal tax return. However, donations must go to a qualified tax-exempt organization recognized by the IRS to be eligible for a tax deduction.
Other popular scams aimed at high earners often involve the promotion of tax avoidance schemes disguised as legitimate tax shelters. For example, unscrupulous tax advisors may suggest inappropriate strategies such as charitable remainder annuity trusts (CRATs), micro-captive insurance arrangements, and syndicated conservation easements that generate high fees for the advisor but open their victims up to IRS scrutiny.
How to Spot IRS Impersonators and Tax-Related Scams
Recognizing tax scams is essential to avoid falling victim to these crimes. Unfortunately, many scams are becoming harder to detect as cybercriminals leverage sophisticated artificial intelligence (AI) chatbots to imitate legitimate organizations and deceive taxpayers.
Nevertheless, there are certain telltale signs that you’re dealing with a scammer. These may include:
- Unexpected contact. The IRS initiates most contacts through regular mail and will never initiate contact with taxpayers by email, text, or social media regarding a bill or tax refund.
- Demand for immediate payment. Scammers often demand immediate payment and may try to intimidate you into paying by threatening to involve law enforcement. However, the IRS will usually mail a bill first, and they’ll never demand immediate payment over the phone. Moreover, the IRS will never threaten to immediately bring in local police, immigration officers, or other law enforcement to arrest you for not paying.
- Specific payment methods. Scammers often require payments via specific methods like prepaid debit cards, wire transfers, or cryptocurrencies, while the IRS allows a variety of payment methods.
- Requests for personal or financial information. Be wary of unsolicited calls or emails asking for personal or financial information, like Social Security numbers, bank account numbers, or credit card information. The IRS doesn’t ask for this type of information via email or over the phone.
- Robocalls or “spoofed” caller ID. Scammers often use robocalls and may manipulate caller ID to make it appear as though the IRS is calling. Remember, the IRS will first contact you by mail, not by phone.
If you believe you’re the target of a tax scam, it’s best not to engage with the scammer. You can always contact the IRS directly to confirm suspicious communications. Otherwise, consider reporting the incident to the IRS and Federal Trade Commission (FTC) so they can investigate further.
Protecting Yourself from Tax Scams
Falling victim to a tax scam can have severe consequences, including identity theft, financial loss, and legal troubles. Thus, it’s critical to protect yourself from these types of crimes to avoid jeopardizing your financial well-being.
To secure your personal and financial information, consider the following steps:
- Awareness and education. Stay informed about the latest scams and learn how legitimate agencies like the IRS contact taxpayers.
- Verify contact. If someone contacts you saying they’re from the IRS, verify their identity by contacting the IRS directly using a number or address available from an official IRS website or document.
- Guard personal information. Be cautious about unsolicited phone calls, text messages, or emails, and never give out personal information such as your Social Security number, bank account, or credit card numbers unless you’re sure about the identity of the person asking and the legitimacy of the reason for their request.
- Use secure communication methods. When providing sensitive information, make sure the communication method is secure. This could mean using a secure (HTTPS) website when sharing information online or giving information in person or over a secure phone line.
- Use security software. Use security software such as antivirus and firewall software and email filters on all your devices and keep it up to date.
- Regularly review your credit and financial statements. Keep a close eye on your credit report and bank and credit card statements and quickly report any suspicious activity.
- Report suspected scams. If you suspect a scam, report it to the IRS and FTC. This can help authorities crack down on scammers and potentially prevent others from becoming victims.
Remember, it’s better to be safe than sorry when dealing with potential tax scams. If in doubt, don’t provide personal or financial information and contact the IRS directly to verify any claims.
Milestone Asset Management Group Can Help
Staying vigilant against IRS impersonators and tax scams is crucial for protecting your financial security and well-being. Although these threats are becoming increasingly sophisticated and difficult to spot, awareness, education, and a healthy dose of skepticism remain your greatest defenses.
In addition, consider working with a fiduciary, fee-only financial planner like Milestone Asset Management Group, who can help you secure your personal information and financial future. Our team of CPAs and tax attorneys stays up to date on current tax laws and scams, so we can advise you on the best way to minimize your tax burden while avoiding costly missteps.
To see if we may be the right fit for your financial planning needs, please schedule an introductory call.
