Common Tax Schemes to Know This Tax Season

Tax schemes peak during this time of year when people are preparing to file their tax returns or looking to hire someone to help with their taxes. Being aware of what seems “too good to be true” is especially important during this time. Keep reading to learn more about common tax schemes and how to avoid them. 

What is a Tax Scheme? 

At the most basic level, a tax scheme is a plan or arrangement where people pay less than what they legally owe in taxes. A tax scheme can be carried out and planned by a taxpayer, but can also be executed by a professional tax preparer, or through a third party established to take advantage of unsuspecting taxpayers. 

A tax preparer may promise to reduce the amount of taxes you owe through large deductions, manipulating loopholes in the tax law, or through complex creative strategies to avoid paying the correct sum of taxes owed. A third party scam may use text messages, social media, or email to coerce you into believing you have more deductions than you do, or may threaten you with false legal action regarding taxes owed. 

A tax scheme is also known as a tax scam, or con, and can be very costly. It can literally cost you your life savings. Other scams can result in your prosecution and imprisonment if you are found guilty of knowingly participating in them. 

The tax preparers who partake in these schemes often benefit by charging a fee based on the size of the refund. This fee structure gives the preparer an incentive to falsely inflate tax credits and deductions, and underreport taxable income. Third party scammers benefit by stealing your personal information, or by collecting false payments. 

It’s imperative that when considering hiring a tax preparer for your individual, or business, needs, you do your research. Don’t be mesmerized by the promise of a large return or exemption, and don’t be fooled by false claims you receive through text, email, or social media. 

Common Tax Schemes to Look Out For 

While most tax schemes ramp up during the tax season, they do occur throughout the year and vigilance needs to be paid in order to avoid them. Below is a list of common schemes to beware of. 

Phishing or Smishing: Taxpayers and tax professionals should be alert to fake communications posing as legitimate organizations in the tax and financial community, including the IRS and states. These types of scams arrive in the form of an unsolicited text or email to lure victims into giving away personal information that can lead to identity theft. 

Phishing–an email that lures victims into the scheme by a variety of ruses such as enticing victims with a phony tax refund, or threatening them with false legal charges for tax fraud. 

Smishinga text or smartphone SMS message that uses the same technique as phishing. Scammers often use alarming language like, “Your account has now been put on hold,” or “Unusual Activity Report” with a bogus “Solutions” link to restore the recipient’s account.

Fake Charities: Scammers often set up fake charitable organizations whenever a crisis or natural disaster occurs. They seek money and personal information, which can be used to exploit charitable givers further. You may be able to claim tax deductions for charitable giving, but only if those donations go to a qualified tax-exempt organization recognized by the IRS.

Unethical Tax Preparers: Most tax preparers are honest professionals, but some are not. Some red flags that indicate your tax preparer may be up to no good include: charging a fee based on your refund, being unwilling to “sign-off” on your tax return or resistant to including their IRS Preparer Tax Identification Number (PTIN) on your return as required by law. 

Tips for Choosing a Tax Preparer 

As a taxpayer, you are responsible for everything included on your tax return–regardless of who prepared the tax return. So, if you’re trusting a tax preparer with that task, you need to be very selective and know what to look for when choosing a preparer. Here are some tips: 

Check qualifications: Use the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications tool. This directory is searchable and sortable, and will ensure you are choosing a preparer who is reputable. 

Ask about service fees: Taxpayers should steer clear of preparers who base fees on a percentage of the refund. Also, avoid preparers who brag about bigger refunds than other preparers. 

Ask to e-file: Taxpayers should ask their preparer to file electronically and choose direct deposit for any refund to be routed to. 

Review your return before signing: You should feel comfortable reviewing your return with your preparer and asking questions. Do not ever sign a blank tax form. 

The tax return process can sometimes be confusing or intimidating, but it doesn’t have to be. Selecting a tax preparer you trust, and who has a good reputation, can be very helpful in alleviating the stress of taxes, and making sure you have it right. Always keep in mind that if something sounds too good to be true, it probably is. 

Have you or someone you know been accused of participating in a tax scheme? Contact the Law Offices of Robert J. DeGroot today!