Tax Refund and Other Scams: How To Spot Them

Tax season isn’t just for the rule followers. Every year, while you rush to prepare your taxes, scammers are oiling their engines and devising new ways to take your money (we’re talking millions), and worse - your identity. And it isn’t just tax season, these scammers are active throughout the year.

This is why, every year, the IRS unveils a compilation of the most prevalent scams (the “Dirty Dozen”) that taxpayers should be vigilant about - from deceitful tax preparers to sophisticated identity theft tactics. In this article, we’ll dissect the tax refund scam - one of the newest scams - and some of the most prevalent of the “dirty dozen” scams to help you identify and protect yourself from them.

Tax Refund Scam

As IRS Commissioner Danny Werfel said, “Scammers are coming up with new ways all the time to try to steal information from taxpayers.” And the newest refund scam proves that these scammers will go to great lengths to convince innocent taxpayers to part with their information and money.

In the tax refund fraud, taxpayers receive what is a cardboard envelope, containing a letter that is supposedly a notice “in relation to your unclaimed refund.” The letter also contains the IRS masthead and includes fake IRS contact details. The recipients are told to share their driver’s license images, which the scammers can then use to commit identity theft. They are also asked to share their numbers, bank information, social security, and bank account type.

How to spot an IRS imposter

You will notice the use of some strange-sounding sentences and requests, such as, “A Clear Phone of Your Driver's License That Clearly Displays All Four (4) Angles, Taken in a Place with Good Lighting.” It also says, "These Must Be Given to a Filing Agent Who Will Help You Submit Your Unclaimed Property Claim." "Once You Send All The Information Please Try to Be Checking Your Email for Response From The Agents Thanks." You’ll notice strange sizing/fonts, etc. You will also notice that it contains an inaccurate tax-filing deadline as well.

Here’s what you must remember: The IRS will contact you through regular mail that is delivered by the US Postal Service.

Also, if you believe you are owed a refund, what you can do is visit the IRS Where's My Refund Page, check the app, or call the IRS on the number on their official website.

Other Scams To Watch Out for

1. Employee Retention Credit (ERC)

The employee retention credit was introduced during the pandemic to incentivize employers to keep employees on their payrolls. Businesses that continued paying their employees or faced a significant decline in gross receipts during the eligibility periods could claim this refundable tax credit. However, this credit is not available to individuals.

What’s the scam?

Tax scammers use the radio and the internet to target innocent taxpayers using urgent and aggressive marketing language. What do they claim? They claim that you are falsely eligible to claim the credit or scam you into miscomputing the claim amount.

These scams have been targeting small business owners into submitting false claims so much so that the IRS announced on September 14, 2023, that a pause would be in place until at least the start of 2024 on processing new ERC claims.

But while the IRS recognizes these scams, you are ultimately responsible for the information on your returns. So, if you are found guilty of making fraudulent claims, you will have to repay the credit along with potential penalties and interest.

2. Phishing and smishing

Suppose you receive an email that appears to be from the IRS, claiming there’s an issue with your tax return. Or the email warns you of legal consequences, such as an arrest or a lawsuit, if you don’t immediately address a supposed tax issue. The email provides a link or phone number to contact the supposed IRS agent or directs you to a fake IRS website, where you’re asked to enter personal and financial information. This is an example of phishing.

Scammers use fear to get you to visit their link, but they could also use positive news - such as that of a large tax refund - to get your attention. The message could include a link to claim your refund, but it leads to a fraudulent website designed to steal your information.

Smishing involves methods similar to phishing. Tax scammers target taxpayers’ smartphones via text messages employing sensational language, such as “Your account is now suspended” or suggesting an “Unusual Activity Report,” accompanied by a fraudulent “Solutions” link to help taxpayers rectify the issues with their account or even claim a refund.

What should you do?

Avoid clicking on any unexpected messages purporting to be from the IRS, as they might secretly install harmful software. This could also serve as a method for malicious hackers to introduce ransomware, preventing you from accessing your system and files.

Always remember that the IRS primarily communicates through traditional mail and will never use email, text, or social media to contact taxpayers about a bill or tax refund.

3. Help setting up an online account

Here’s what the IRS wants you to remember about setting up your IRS online account - You can do it yourself! So, really, any “helpful” third party, offering assistance in setting up a taxpayer’s IRS Online Account on IRS.gov really just wants your personal information.

So what is their modus operandi?

Well, first thing - in the course of “setting up your online account,” they request your personal details, including your address, Social Security number, or Individual Taxpayer Identification number (ITIN), as well as photo identification. They then sell your valuable information to other wrongdoers. Your data could be used to file fake tax returns, obtain loans, and open credit accounts.

The sole legitimate platform for creating an IRS Online Account is IRS.gov. Therefore, you needn’t go looking for third-party assistance, except for the approved IRS authentication process through IRS.gov, when setting up an IRS online account.

4. Shady tax professionals

IRS Commissioner Danny Werfel emphasized, “While most tax professionals offer valuable advice and aid in navigating complex tax matters, there are cases where taxpayers receive misguided advice from untrustworthy preparers who quickly vanish.”

So you should be on the lookout for some common red flags - such as filing fees charged based on refund amounts. Some fraudulent tax preparers, known as “ghost” preparers, may refuse to sign your tax return or request you to sign a blank one. These are glaring warning signs, emphasizing the importance of relying on a reputable tax professional.

5. Social media misinformation

Form 8944

If you’ve been on social media in recent times, it’s likely you’ve come across a claim that taxpayers - even those who owe taxes - can use Form 8944 to receive an IRS refund. Needless to say, this is an absolutely false claim and a misuse of Form 8944, known as the Preparer e-file Hardship Waiver Request. And this type of misinformation could potentially lead to fraudulent form submissions.

Although Form 8944 is a valid IRS tax form, it is specifically intended for a specific group of tax preparers seeking a waiver to file tax returns on paper rather than electronically. It is not a form accessible to regular taxpayers to evade their tax liabilities. Those who knowingly submit forms with false or deceptive information may face severe repercussions, potentially including both civil and criminal penalties.

Form W-2

Form W-2 fraud is another prevalent scam currently circulating on social media, encouraging individuals to use tax software to manually complete the Wage and Tax Statement (Form W-2) by fabricating some of their income details. How do the fraudsters pull this off? They get people to invent inflated income and withholding amounts, along with fictitious employer information. They then guide individuals to electronically submit the false tax return, hoping to receive a sizable refund.

What you need to remember is that the IRS actively monitors this scheme. They also collaborate with payroll companies, major employers, and the Social Security Administration to verify W-2 information. So really, even if you submit falsified information, the IRS could verify your W-2 with the form it receives directly from your employer.

6. Spear phishing

As the name suggests, spear phishing is a form of phishing that targets a specific organization or business.

Now, this is a serious scam because of the heightened potential for loss if an organization experiences a data breach, which could lead to client data being stolen and identity theft. Also, it gives the perpetrator a way to file fraudulent returns.

While taxpayers can fall victim to tax-related identity theft through spear phishing, the risk multiplies when criminals target taxpayers to gain access to their credentials or their clients’ tax-related information.

So, typically, you should watch out for suspicious emails posing as a tax preparation application or another e-service or platform. You may also see the IRS logo or be hit with urgent messages like “Action Required: Your account has now been put on hold.”

Here’s what the IRS recommends taxpayers do to avoid spear phishing:

1. Avoid clicking on suspicious links.

2. Verify requests with the original sender.

3. Be cautious throughout the year, not just during filing season.

4. Offer in compromise mills

The Offers in Compromise (OIC) program is a crucial initiative that the IRS has in place to assist individuals who are looking to find a way to settle their federal tax dues.

Scamming entities often advertise on radio and television, claiming they can resolve an individual’s tax debt at a low cost. However, these entities also charge exorbitant fees - leading the taxpayer to pay more than they would’ve if they’d contacted the IRS themselves.

How can you prevent this? The IRS encourages individuals to peruse the information available on IRS.gov. This will help them determine if they qualify for the Offers in Compromise program and avoid engaging expensive intermediaries.

8. Deceptive charities

You may notice various charities emerge in the wake of crises or disasters. While several operate legitimately and do good work, other fraudulent charities seek to make the most of these adverse circumstances. The scammers establish these fictitious organizations in an attempt to exploit the generosity of the public, aiming to acquire funds and personal details, which can then be leveraged for identity theft.

Individuals who contribute money or items to a charity may qualify for a deduction on their federal tax return if they itemize their deductions. But what you must know is that such deductions are only applicable when donations are directed to a recognized tax-exempt organization approved by the IRS.

Spot and Avoid Tax Scams

Spotting an IRS scam requires vigilance and awareness. Here are some key tips to help you recognize and avoid IRS-related scams:

• Communication method: The IRS primarily initiates contact through regular mail. Be cautious of unsolicited emails, text messages, or phone calls claiming to be from the IRS. The IRS does not use these methods for official communication about tax matters.

• Threats and urgency: Scammers often use intimidating language, threats of arrest, legal action, or immediate consequences if you do not comply. They create a sense of urgency to pressure you into taking hasty actions.

• Request for personal information: The IRS will never ask for sensitive information like your Social Security number, bank account details, credit card numbers, or passwords over the phone, email, or text.

• Payment methods: The IRS does not demand immediate payment through unusual methods such as gift cards, wire transfers, or cryptocurrency. These are red flags for scams.

• Confirmation of identity: If contacted by someone claiming to be from the IRS, ask for their name, badge number, and call-back number. Verify their identity by calling the official IRS phone number listed on the IRS website.

• Verify the claim: If you receive a notice or communication from the IRS that you find suspicious, independently verify its legitimacy by contacting the IRS through their official channels.

• Question unsolicited offers: Be wary of unsolicited offers, especially those claiming to help you obtain large refunds or benefits. Always seek professional advice from legitimate sources.

• Check for official documentation: If a tax professional offers to help with IRS matters, ensure they provide proper documentation and authorization before sharing any personal information.

• Report suspicious activity: If you suspect a scam, report it to the IRS through their official website. Unsolicited emails from anyone purporting to be the IRS should immediately be reported to the IRS via phishing@irs.gov. To report an abusive tax scheme or return preparer, you must mail or fax a completed Form 14242, Report Suspected Abusive Tax Promotions or Preparers and any supporting material to the IRS Lead Development Center in the Office of Promoter Investigations.

  You could send the mail to the following address:

  • Internal Revenue Service Lead Development Center Stop MS5040 24000 Avila Road Laguna Niguel, California 92677-3405 Fax: 877-477-9135

• Stay informed: Stay updated on the latest IRS scam alerts and warnings. Knowledge is your best defense against falling prey to scams.

Key Takeaways

• Tax season is a prime time for scammers to attempt to steal money from taxpayers and commit identity theft.
• The IRS releases an annual list of prevalent scams, known as the “Dirty Dozen,” including deceitful tax preparers and identity theft tactics.
• One of the newest scams is the tax refund scam, where scammers impersonate the IRS and request sensitive information like driver’s license images and bank details.
• To spot an IRS imposter, look for unusual language, inaccurate deadlines, strange formatting, and the mode of communication. The IRS primarily communicates through regular mail, delivered by the US Postal Service.
• Be cautious of scams related to the Employee Retention Credit (ERC), which target small business owners with false claims about eligibility for the credit.
• Phishing and smishing involve fraudulent messages claiming to be from the IRS, aiming to trick recipients into revealing personal and financial information.
• Be wary of third parties offering help with setting up an IRS online account. Use only the official IRS website for this purpose, and remember you can do it on your own.
• Watch out for shady tax professionals who may charge fees based on refund amounts or refuse to sign tax returns.
• Social media misinformation, especially regarding forms like 8944 and W-2, can lead to fraudulent submissions and potential penalties.
• Spear phishing targets specific organizations or businesses, posing a high risk of data breaches and identity theft.
• Offer in Compromise Mills charge high fees for a service that individuals can often do themselves through the IRS.
• Deceptive charities may emerge after crises, seeking to exploit generosity for personal gain. Ensure donations go to recognized tax-exempt organizations.
• Tips for spotting and avoiding tax scams include verifying communication methods, being wary of threats and urgency, never sharing sensitive information, questioning unsolicited offers, and staying informed about IRS alerts and warnings.
• Report suspicious activity to the IRS through official channels.

Conclusion

Scammers are relentless in their pursuit to exploit vulnerabilities, making it crucial for taxpayers to stay vigilant and informed. Recognizing the red flags, such as unusual communication methods or requests for sensitive information, can go a long way in protecting one’s financial well-being and identity.