Every year, unsuspecting people fall victim to a variety of tax scams, ranging from identity theft, check fraud to return preparer fraud. While it may seem to be too early to be worrying about your 2012 tax return—the year isn’t even over yet, after all—it’s a good idea to familiarize yourself with a few common tax planning scams now, so that you can take steps to avoid becoming a victim. Below, I’ve outlined four wealth management tax planning tips and scams to avoid, and the things that you need to know about so you can spot a potential issue before it becomes a real problem.
Tax Scam #1: Identity Theft
You’re probably aware of the risk of identity theft. But identity thieves aren’t just after your credit card information or the money in your bank account. They may also steal your personal information and then use it to file a fraudulent tax return (and get a refund from the IRS in the process). The IRS is aware of this scam and keeps an eye out for returns that could be fraudulent. If you get a notice from the IRS that more than one return was filed in your name, that could be a sign that your identity was stolen.
You can avoid becoming a victim of this scam by taking steps to prevent identity theft, such as not sharing your Social Security number and shredding documents with personal information. If you have older family members, be sure to watch out for signs of identity theft there as well, since scammers often target elderly people.
Tax Scam #2: Return Preparer Fraud
Many people turn to tax preparers for help in filing their return. The vast majority of these preparers are honest, but a few are scam artists. These unscrupulous individuals may trick you out of your money in a variety of ways. Some charge inflated fees, others lure clients in by promising that they’ll receive a refund, and a few may even skim a portion of your refund. As with any financial transaction, use caution when choosing a tax preparer. Avoid preparers who don’t have a Preparer Tax Identification Number (PTIN), charge fees based on a percentage of your refund, ask you to sign a blank tax return, refuse to give you a copy of your return, or require that your return be deposited in their bank account rather than your own.
Tax Scam #3: “Free” Money from the IRS
Every year around tax time, flyers and ads appear suggesting that people can get “free” money from the IRS with little or no documentation. These ads often appear in churches, targeting older adults and low-income people, and the rumors of free IRS money may be spread by people whose intentions are good. Scammers are behind these ads, however. Their goal is to lure people in with promises of guaranteed refunds; by the time people realize they’ve been conned, the scammers have disappeared, usually taking the victim’s money with them. Remember, if something sounds too good to be true, it probably is.
Tax Scam #4: Misused Trusts
Trusts can be an excellent (and completely legitimate) estate planning tool. Occasionally, however, less-than-ethical individuals encourage their clients to use trusts to hide income or assets from the IRS and improperly avoid income taxes. While trusts can be a valuable planning tool, it’s important to choose wisely when selecting a professional to help you set up a trust.
Plan Today to 2013 Tax Season
Tax planning can be complicated. One thing you can do to avoid scams and make smart tax decisions is to do your research. Our article on online tax tips can help you sort out good information from the bad when conducting an online search. But your best bet is to work with an experienced financial professional who can help you navigate the confusing world of IRS regulations, so that you pay as little in tax as possible without running afoul of the law—or becoming the victim of a scam.
By Chris Cooper CFP®