A New Year for Identity Theft. Be Careful With W-2s!

Identity Theft continues to be a growing issue for the IRS, tax payers, and tax preparers. One scheme affects businesses and their employees, and it involves W-2 forms that are used to report employee wages and withholding. The way that the scam works is that the fraudster pretends to be a CEO or other senior executive and sends an email to Human Resources or Payroll departments asking for copies of W-2s. Alternatively, the email pretends to be from HR or Payroll asks individuals for information “necessary to prepare W-2s.”

In either case, if the email recipient responds, then he or she has provided the swindler with personal identifying information or PII as well as important financial information. The fraudster can then use the information to create fake accounts. This time of year, a common scam is creation and filing of fraudulent tax returns.

The key to this fraud is that the perpetrator can create an email that pretends to come from someone official. Recipients want to be helpful, and reading what they think is an authentic email, they provide the information. The best way to guard against this is with healthy skepticism. When in doubt, contact the sender directly but do not reply to the email. If the email address is spoofed, then you will send the response to the scammer if you simply hit reply. In addition, ask yourself if this is a normal procedure. Why would an employer need to ask existing employees for information necessary to create W-2s? Why would a senior executive ask for a copy of W-2 forms unexpectedly?

Be security conscious and do not become a victim of fraud this year.

Fraud affects your relationship with the IRS and your tax preparer too. Your tax preparer will probably ask you for additional identification this year. In addition, if you have ever been the victim of tax-related identity theft, the IRS will have provided you with a code that will have to be entered on your tax forms.

The IRS provides helpful advice about identity theft. If you become a victim, you should make a report to the Federal Trade Commission.

IRS Dirty Dozen – Padding Deductions

Tempted to boost your tax refund by adding a few extra deductions or claiming some additional business expenses? Be careful. Padding deductions is another one of the IRS Dirty Dozen. Most taxpayers file honestly each year. However, there are also taxpayers that overstate deductions or claim credits such as the Earned Income Tax Credit (EITC) or Child Tax Credit when they are not entitled to do so. This is not to say that you should not take legitimate deductions. If you made large charitable contributions, then you should claim them.

The penalties for filing incorrect returns can be significant. They can include:

  • 20 percent of the disallowed amount for filing an erroneous claim for a refund or credit.
  • $5,000 if the IRS determines a taxpayer has filed a “frivolous tax return.” A frivolous tax return is one that does not include enough information to figure the correct tax or that contains information clearly showing that the tax reported is substantially incorrect.
  • In addition to the full amount of tax owed, a taxpayer could be assessed a penalty of 75 percent of the amount owed if the underpayment on the return resulted from tax fraud.

It is also possible to face criminal charges for filing a fraudulent return. This could mean additional penalties and even a time in prison.

What can you do to make sure you file an accurate return? Begin with your documents. If you have legitimate deductions, by all means take them. If you have business expenses, you should claim them. If you have any doubt about what is permissible, contact a tax professional such as a CPA, Enrolled Agent, or a tax attorney. The IRS also has plenty of information available on its website.




IRS Dirty Dozen – Preparer Fraud

Another one of the IRS Dirty Dozen is Preparer Fraud. The vast majority of tax preparers are honest. Sadly there are some preparers that take advantage of unsuspecting taxpayers. About 60 percent of taxpayers use professional tax preparers, so the opportunity for fraud is large. IRS Commissioner John Koskinen says,

Choose your tax return preparer carefully because you entrust them with your private financial information that needs to be protected. Most preparers provide high-quality service but we run across cases each year where unscrupulous preparers steal from their clients and misfile their taxes.

One way to protect yourself is to check out your preparer. The IRS maintains a directory of preparers that are registered with the IRS. This includes:

  • Attorneys
  • CPAs
  • Enrolled Agents
  • Enrolled Retirement Plan Agents
  • Enrolled Actuaries
  • Annual Filing Season Program participants

You can also ask your preparer if he or she has a professional certification such as enrolled agent (EA), certified public account (CPA), or attorney. Preparers registered with the IRS also have a PTIN which is a registration number.

A few things that you can do to protect yourself include reviewing your return before it is filed. You should also never sign a blank return. If you are the victim of an unscrupulous preparer, you should report him or her to the IRS.

Check out the IRS’ press release for more details about this Dirty Dozen Scam.

IRS Dirty Dozen – Inflated Refunds

Every year, the IRS compiles a list of tax-related scams called the Dirty Dozen. I’ll highlight the scams over the next couple of weeks. One of the Dirty Dozen this year is falsely inflated refunds. While this sounds like something a taxpayer might do by claiming unwarranted exemptions, deductions, or credits, the scam is actually related to unscrupulous preparers. The IRS Commissioner reports:

Exercise caution when a return preparer promises an extremely large refund or one based on credits or benefits you’ve never been able to claim before. If it sounds too good to be true, it probably is.

The best way to protect yourself is to make sure that you use a legitimate tax preparer. You can check out my blog post for an IRS video about how to choose a tax preparer.

Another thing that you can do is to be sure that the preparer that you use has the proper licensing or credentials. These credentials include:

  • Attorneys
  • CPAs
  • Enrolled Agents
  • Enrolled Retirement Plan Agents
  • Enrolled Actuaries
  • Annual Filing Season Program participants

The IRS maintains a page with guidance for choosing a tax professional. https://www.irs.gov/tax-professionals/choosing-a-tax-professional

Keep in mind that whether you prepare your tax filings yourself or use a professional, you are still responsible for the return. Always review your return, and avoid these potential problems:

  • Under reported or unreported income
  • Questionable tax positions
  • Claiming excess exemptions
  • Deductions or credits without proper documentation

Remember the statement by the IRS Commissioner, “If it sounds too good to be true . . .”


IRS Dirty Dozen – Fake Charities

Every year, the IRS compiles a list of tax-related scams called the Dirty Dozen. I’ll highlight the scams over the next couple of weeks. One of the Dirty Dozen this year is fake charities. The IRS commissioner reports:

Fake charities set up by scam artists to steal your money or personal information are a recurring problem. Taxpayers should take the time to research organizations before giving their hard-earned money.

The IRS offers these tips if you make charitable contributions.

  • Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible. Legitimate charities will provide their Employer Identification Numbers (EIN), if requested, which can be used to verify their legitimacy through EO Select Check. It is advisable to double check using a charity’s EIN.
  • Don’t give out personal financial information, such as Social Security numbers or passwords, to anyone who solicits a contribution. Scam artists may use this information to steal identities and money from victims. Donors often use credit cards to make donations. Be cautious when disclosing credit card numbers. Confirm that those soliciting a donation are calling from a legitimate charity.
  • Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.

The IRS also notes that many people are defrauded by fake charities following disasters.

The scams work several ways. The most common is to persuade unsuspecting individuals to donate to bogus charities. Another is to use the appeal as a way to collect personal information that can be used for identity theft.

Please do not be dissuaded from continuing to contribute to worthy causes. However, be aware of the potential for fraud and be vigilant. There are resources to help you make good decisions about charitable contributions under the Resources tab on www.elycpa.com.