5 Most Common Tax Scams: How to Recognize and Avoid Them

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With the new year right around the corner it is time to start thinking about your 2010 tax filing. With every tax season comes a rise in various types of tax scams. Taxes are a big target for a variety of scams each year due to the amount of money involved in taxes and the amount of personal information required with tax filings.

Understanding the common tax scams can help ensure that you can recognize and avoid them. Here are the five most common tax scams that you should be aware of this tax season

Scam 1: Phishing

Phishing can occur through email, fake websites and even social media websites, like Twitter and Facebook. Phishing works like this: a scammer will attempt to convince people that they are owed a tax refund. The only way for the consumer to get their refund is to provide personal information to prove their identity. When the unsuspecting consumer begins providing personal information, they become susceptible to being victimized by identity theft.
Recognize suspicious emails that claim to be from the IRS. Do not click on links in emails asking for personal information or claiming to be from the IRS. Doing so can result in the installation of dangerous viruses or spyware on your computer, which can gather personal data from your files and Internet activities. If you receive a suspicious email from the "IRS," forward it to phishing@irs.gov.

Keep in mind that the IRS never sends out unsolicited emails addressed to specific taxpayers. The IRS handles all personal matters by phone or regular mail, and will only send out general emails in bulk. Never offer personal information in response to an email that you believe is from the IRS, and never click on any links from the "IRS," especially if they are asking for personal information.

If you believe that you have encountered this type of scam or have been a victim of this type of identity theft, here are some actions that you should follow:

  • Report it to the IRS: If you believe you have encountered this type of scam should follow the IRS instructions on reporting the phishing scam.
  • Report it to the FTC: You can contact the FTC online or by telephone at 1-877-ID THEFT.
  • Notify the three major credit bureaus: If you know that you have been a victim of fraud then you should call the fraud units of Equifax, Experian and TransUnion.
  • Consider identity theft protection: There are many companies out there that can monitor changes in your credit and notify you when changes are made. Some utilize sophisticated technology to detect and alert you to a misuse of your personal information and suspicious activity. One suggested company is LifeLock.
Scam 2: Tax Return Preparation Fraud

Many people hire professional tax preparers to assist them with tax returns. Unfortunately, there are actually dishonest tax preparers out there who can cause you financial harm. There are numerous reports of preparers keeping some of each clients' tax return or charging high fees for tax return preparation in exchange for promising extremely high tax refunds.
Recognize that not all tax preparers are honest and do your best to find someone reputable to assist you with filing your tax return. To help enforce compliance with tax laws in the future, the IRS will be placing requirements on tax preparers. They will also begin requiring competency tests and ongoing education for any tax preparer that completes tax returns for money.

Scam 3: Frivolous Arguments to Avoid Paying Owed Taxes

Tax payers often fall victim to "frivolous schemes" that encourage consumers to avoid paying owed taxes. In these schemes, the scammer convinces the tax payer things, such as "paying taxes is voluntary, "filing a zero-return results in not having to pay taxes" and "the first amendment allows individuals to refuse to pay taxes on religious or moral grounds," among others. It is important to remember these false arguments because they will not hold up in court.

Scam 4: False Forms for Bigger Refunds

In some scams, an individual will file false information on their tax return in order to claim a refund they are not owed. In a bigger scheme, a tax preparer or scammer helps a tax payer file misleading information for a larger return (in exchange for a percentage of that return).

Always report everything 100 percent accurately on your tax return. IRS computers are becoming more and more sophisticated each year. They have a program that can compare your reported earnings against what your employer or contractor reported. The IRS also runs statistical analysis on your return to check for red flags.

Even if you have gotten away with these things in the past, do not assume that you can do it again the future as the IRS is becoming extremely proactive in preventing taxpayers from getting away with this in the future. If you have any uncertainty regarding the best way to report information, obtain assistance from someone knowledgeable.

Scam 5: Nontaxable Social Security Benefits

Making mistakes - intentional or not - on the reporting of your nontaxable Social Security Benefits with excessive withholding is a penalty that will result in a $5,000 fine. When you file taxes this way, you end up with no reportable income to the IRS on your income tax return, and often the withholding amount and reported income are both incorrect.

To avoid costly mistakes if you are unsure of how to report your Social Security benefits, seek assistance from a tax professional.

Taxes are a fact of life for everyone, which is unfortunately why they are the target of so many scams. Remember to be vigilant and aware of the various scams and how to avoid them during this upcoming tax season.

This guest post was provided by BackTaxesHelp.com, a website that helps taxpayers find the best solutions to their tax problems. Visit their site and find more information on tax fraud, tax payment plans and more.
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