Tax fraud is big business. Tax refund fraud alone affects millions of people every year and costs the government billions of dollars. In 2011, fraudsters stole more than $3 billion from the government via an estimated 1.1 million false returns.
That same year, the Internal Revenue Service blocked more than 12 million false refund claims worth more than $40 billion. For some context, that’s more money than Goldman Sachs raked in last year. Without the 3,000 or so investigators and enforcers at the IRS and many more spread across the U.S., financial gangsters would be committing so much fraud it would make even the most callous Wall Street fat cat blush.
The IRS has provided anecdotes about some notable cases from the past year. Among them is the self-proclaimed “First Lady” of tax fraud, who is estimated to have defrauded the government for $2.2 million and was arrested in July. In another instance, an identity fraud ring filed returns worth about $3.7 million. The IRS reports that it has flagged potentially fraudulent returns worth $1.3 billion for fiscal 2013. Thanks to increased enforcement, the amount of fraud being caught should go up while the amount successfully being committed goes down, but the IRS can only do so much.
Each year, the IRS reports on the “Dirty Dozen,” a list of the top 12 tax scams that the public should be aware of. Many of these scams can result in a fraudulent return being filed on your behalf, or worse. Here’s what the IRS has to say.
1. Identity theft
“Identity theft occurs when someone uses your personal information, such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes,” says the IRS. “In many cases, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.”
According to the Identity Fraud Report by Javelin Strategy and Research, 12.6 million people, more than 5 percent of the U.S. adult population, were the victim of identity theft in 2012. If this number still feels a little abstract, it works out to about one American ever three seconds. Nearly one in four people who are initially notified of a data breach end up having their identity stolen. Identity fraudsters stole nearly $21 billion, the most since 2009.
The good news is that as enforcement mechanisms improve — one thing that we can thank the IRS for — the amount of misuse per incident is dropping. The average duration that an identity thief used stolen information dropped to 48 days in 2012, down from 95 days in 2010.
2. Pervasive telephone scams
When an adjective like “pervasive” works its way into the IRS lexicon, something must be terribly wrong. The IRS has observed an increase in the number of phone scams across the country. These scams involve fraudsters pretending to be IRS agents “in hopes of stealing money or identities from victims.”
Here are some characteristics of calls to be cautious of:
- Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
- Scammers may be able to recite the last four digits of a victim’s Social Security number.
- Scammers “spoof” or imitate the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
- Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
- Victims hear background noise of other calls being conducted to mimic a call site.
“Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information,” said the IRS. “Armed with this information, a criminal can commit identity theft or financial theft.”
Email scams are as old as email, but fraudsters wouldn’t survive if they weren’t getting more sophisticated. If you’re unsure whether an email is genuine, you can report it directly to the IRS. A quick Google search of the sending address may also provide some insight.
4. False promises of “free money” from inflated refunds
The age-old rule of thumb applies to tax refunds as well: If it sounds too good to be true, it probably is. The IRS notes that when tax season rolls around, fraudsters often pose as tax preparers, “luring victims in by promising large federal tax refunds or refunds that people never dreamed they were due in the first place.”
There are two big things to keep in mind here. First, do some homework on the people preparing your tax return. Don’t give your personal information to a business with no history. Two, remember that you are ultimately responsible for whatever is on your tax return, even if it was prepared by someone else. You could end up with the bill for a fraudster’s bad behavior if you aren’t careful. If you’re going to hire a professional, make sure they’ve got a long, clean reputation.
5. Return preparer fraud
With the last scam in mind, the IRS reports that “About 60 percent of taxpayers will use tax professionals this year to prepare their tax returns. Most return preparers provide honest service to their clients. But, some unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.”
6. Hiding income offshore
This isn’t so much the work of a third-party fraudster as it is the work of a would-be taxpayer trying to reduce their tax liability. Hiding money in offshore bank accounts is about as classic a tax dodge as you can get, and the IRS is cracking down on this behavior. “Since 2009, tens of thousands of individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations,” the IRS reports. “And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore is increasingly more difficult.”
Check out the IRS website for the rest.