A few months ago, Meadowlands USA featured an article on tax scams. As a follow-up, this month we are going to present you with some real life examples from my practice, in the hopes that you and your loved ones will be able to avoid the scammers. These types of scams take on various forms. They are constantly on the rise and cut across all swaths of our society.
As accountants and tax professionals, we are spending an increasing amount of our time helping clients deal with the fear, or worse, the impact of such scams. While the Internal Revenue Service (IRS) is becoming more proactive in detecting and dealing with the perpetrators, the bad guys are at work 24/7 trying to stay a step ahead.
Each year, the IRS publishes a list of their “dirty dozen” tax scams. Here are few that I have come across personally, just during the past tax season:
Return preparer fraud – Client K is a single father employed in the security field. He comes to me with a notice from the IRS, stating that they have denied certain deductions on a prior year return and asking him to return $7,000. The return in question was organized by another tax preparer who, my client explains, has historically had the check mailed to his office (actually his mother’s home) and paid my client in cash. Client K further states that he never received the funds for the tax year in question. The preparer, whose name my client does not know, has disappeared.
We prepared IRS tax preparer fraud statements (Forms 14157 and 14157-A) detailing the fraudulent activities and asking for relief from the assessment. So far the IRS is not budging.
Identity theft – Client D is a marketing executive with a major retailer. She and her husband, who file separately, both received notices early in the filing season alerting them that 1040A short forms had been filed for each of them (using their names and social security numbers). The notice was asking them to verify that they had indeed filed the returns. This is part of the IRS’s proactive efforts to detect fraud.
Since Client D and her husband typically file 1040 long forms, the service picked up on the altered pattern and notified the taxpayers. Of course those returns had not been filed by them. As a result, they had to file their returns by paper and submit identity theft paperwork. Each receive an identity protection personal identification number (IPPIN) from the IRS for future filings. As an aside, D’s paper return was never entered into the system, creating quite a bit of angst when she applied for a mortgage a few months later.
The W-2 scam – I gave a presentation back in March on “The Latest in Tax Scams.” One of the scams I highlighted was a relatively new one, the W-2 scam. In this scam, a company’s payroll or human resources department gets an official-looking company email from a high-ranking executive asking for a listing of employees including their names and social security numbers. This information is then used to create falsified W-2s, followed by tax returns which direct the refunds to the scammers.
Within a week or so after my presentation, I received a call from Client J saying that his wife’s entire company had fallen prey to this very scam. A meeting was called for all employees, where they were advised of the breach. All of the employees then received one-year free identity protection from the company. The implications from a breach such as this can be far reaching and won’t be known for months, perhaps years. In case you’re wondering, I’m not sure what—if anything—happened to the employees who released the information.
The telephone impersonation scam – This one has been around for a few years now, but appears to still be going strong. Client T, an Ivy League-educated attorney for a major U.S. company, calls me in a panic. She has received a voicemail message from an IRS employee who left his badge number (therefore, he must be official), stating that she owed approximately $5,000 for a recent tax year and he demanded immediate payment under threat of arrest.
Client T was frantic, calling me to demand that I not only confirm or deny that this was a legitimate debt, but that I also obtain documentation that she is in compliance for all years. Upon speaking to her directly, I was able to assuage her fears. I managed to convince her that the call was indeed connected to a very popular scam. Perpetrators of this scam particularly target immigrants and the elderly, such as Client S, an octogenarian who recently left me three voicemails on two different numbers after receiving a similar call. Understandably upset, she was ready to pay as instructed. However, thankfully, she wanted to speak to me first.
These scams, and others like them (for a more comprehensive list, visit the IRS website at https://www.irs.gov/uac/newsroom/irs-wraps-up-the-dirty-dozen-list-of-tax-scams-for-2016) are proliferating at a rapid rate. They are consuming an increasing chunk of taxpayer and tax preparer time. While most efforts are unsuccessful—and the tax community (IRS, states, preparers, etc.) is becoming better at detecting and preventing these scams—the fraudsters only need to be successful a small percentage of the time.
What can you do? There is nothing that can guarantee that you, as a taxpayer, will not fall prey to one of the many scams that abound (remember, there are new scams being concocted even as you read this article), but there are steps you can take to mitigate potential negative outcomes:
- Choose your tax preparer wisely. While efforts have been undertaken in recent years to regulate the tax preparation industry more heavily, there are still many unscrupulous preparers. You should never choose a preparer who guarantees a refund or charges a fee based on the amount of your refund—if it sounds too good to be true, it probably is!
The IRS has published a list of guidelines for choosing a preparer, which is fairly comprehensive (https://www.irs.gov/tax-professionals/choosing-a-tax-professional).
- If you get a call, email or other form of correspondence from the IRS or another taxing entity, contact your tax preparer immediately. Most preparers are familiar with the various forms of scams in place, and can help you determine whether or not the call or letter is legitimate
- Remember that there are certain things that the IRS will never do, including:
- Demand immediate payment
- Call you without first mailing
- Require a specific form of payment
- Ask for credit or debit card numbers over the phone
- Threaten to bring in local law enforcement
- If you do receive a threatening phone call, contact your local police department.
- Forward scam emails to firstname.lastname@example.org.
- Never (ever, ever, ever) send money or share personal information.
James D. Brown, CPA, CFE, CGMA is the managing partner of James D. Brown, CPA, a full service accounting and consulting firm with offices in Teaneck and New York City. With more than 30 years in business, the firm’s clients include attorneys, physicians, entertainers, professional athletes, corporate executives and many small and medium sized business owners. The firm has clients in many states and services individuals and all forms of business. He is often called upon as guest speaker on the subjects of accounting and taxation, has held leadership positions in various civic and professional organizations, and has been published in Ebony and Black Enterprise Magazines.