Fraud and the IRS

While we’re all still smarting from paying taxes, it’s tough to hear that the IRS is having more fraud problems.  The Treasury Inspector General is complaining that the IRS still hasn’t addressed enforcement issues  in the whistle blower program that were discovered in 2009.  The issues are not small, ranging from poor controls in safeguarding data, poor processing and lack of timeliness in addressing tax fraud. One example is that IRS employees aren’t required to note the date of a claim.  Needless to say that’s pretty critical in terms of tax payments.  Tax payers who don’t file timely have to pay stiff penalties.  The IRS also recently won in Tax Court on the issue of being able to take any refunds due to offset taxes owed from prior periods.   Why not apply some of their own standards to themselves?

On a happier note, in light of concerns about government employees not behaving in exemplary fashion when they’re out of the office, the IRS has reportedly nixed out of town training conferences.  While more training is clearly needed, it sounds like it is simple enough to be done inside the Beltway. 

The other fraud problem that refuses to go away, is the ongoing issue of taxpayer identity theft.  Someone who has stolen your social security number files a tax return in your name that gives them a refund. The IRS only finds out that it wasn’t really you is when you file the legitimate tax return.  Needless to say untangling the ensuing mess is horrible.   The service is reportedly putting more resources against this problem, but they are not winning the battle.  A key fact to remember is that the IRS only uses snail mail to send notices.  You will never hear about a legitimate audit, refund or data request form the IRS via e-mail.  The service also doesn’t use social media sites.

Caveat Emptor -- Buyer Beware

As I can tell you from up close exposure, the tax code doesn’t get simpler each year.  If you are seeking out help with this project it is important to be careful.  The IRS (which right now is not on my list of favorite things!) did put out a helpful list of warning signs that the person who is offering tax assistance may not be legit. 

• No Preparer Tax identification number
  • In addition to a CPA license, I need to pay for one of these too.  At this point, they’re pretty easy to get, so a fraudster who doesn’t even bother to get one is both a lawbreaker and lazy.
• Not giving you a copy of the tax return to sign
  • You are responsible for what goes on the return, not your preparer.  Make sure you are familiar with what is on it.  Telling the IRS I didn’t look at my return will not help you avoid penalties.
• Promises related to refunds
  • No one should prepare taxes based on a percentage of your refund or promise you a bigger refund.  The only reason you get a big refund is that you overpaid your taxes during the year.  What you want in terms of tax preparation help is someone who helps you plan so you don’t give the IRS your money interest free for a year. 
• Tells you it’s OK to put false information on your tax return
  • The IRS doesn’t fight fair to begin with.  Don’t give them ammunition to put into the gun.  Be honest, and work with someone who can help you pay less in tax.  Tax avoidance is legal and encouraged.  Tax evasion is expensive and can involve jail time.

  

From my reading on this topic I would add a note to be skeptical of deductions that seem too good to be true.  Deductions and credits are usually designed so the more they could help you, the less they actually do.  An example of this kind of “advice” is a deduction of all your expenses – including personal items – because you have a home based business.  First of all you can’t take personal expenses for a business. Also, deductions for businesses get limited based on how much you invested in the business in the first place.  This is a perfect illustration of how the complexity of the system makes it easier to victimize people. 

While I’m not a fan of having to pay taxes, it is something to take seriously.  When the IRS decides you’ve done something wrong (even if you haven’t) it’s an enormous hassle.  If you’re going to spend time and money on tax preparation, it’s worth an extra amount of due diligence to think about what credentials your helper really has. 

Be Careful Out There

Each year the IRS releases its list of most common tax fraud schemes.  The theory is if they show you how unoriginal your tax cheating idea is, you won’t be tempted to try it.  Unfortunately the most common scams actually don’t involve cheating by the taxpayer – they involve fraud that hurts taxpayers. 

The first issue is identity theft.  Someone files a tax return in your name with fraudulent information that nets the criminal a refund.  When the IRS cracks the fraud on the return, they go after the innocent taxpayer who didn’t even know there was a problem.  The IRS says they have active cases against 105 people now in 23 states that involve about $1.4 billion dollars.  The IRS tries to give people a heads up when they get more than one tax return from the same person or if they find wages from an employer who isn’t on the taxpayer’s tax return.  The problem is growing so fast, the IRS has a web page set up to talk about how to handle it if you think you’re a victim.

Next on the list is a practice that I’ve encountered, and warned about previously.  Despite years of warnings, it’s still flourishing.  We had a client who got one of these e-mails last week.  Someone e-mails you telling you the IRS or EFTPS (the website where you file payroll taxes among other things) and says you have a problem and need to contact them right away.  Here’s the IRS advice on this topic.

If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.

It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information.  This includes any type of electronic communication, such as text messages and social media channels.  The IRS has information that can help you protect yourself from email scams.

Last, on the list of top scams that don’t involve active tax payer cheating is a fraudulent preparer.  Needless to say this is a topic that makes me more than a little emotional.  In fact I think it deserves a separate post.  In the meantime I’m going to make sure I’ve shredded any documents I have with someone’s social security number on it.