June 16, 2024

We often think of high-profile celebrities like Willie Nelson dealing with $16.7 million unpaid taxes, or Martha Stewart jailed for evading taxes, when it comes to tax fraud. However, it’s not just the famous personalities, even ordinary individuals sometimes commit tax fraud and bear the adverse consequences.

Understanding Tax Fraud

Tax fraud is a deliberate attempt to deceive the government to evade paying taxes. It’s not just committed by wealthy individuals, tax fraud has become commonplace. It’s not only about evading taxes but also involves submitting falsified returns to claim fabricated refunds or using someone else’s identity to escape paying income taxes.

Various Forms of Tax Fraud

Tax fraud involves multiple types of deceptive tactics used by criminals and even otherwise law-abiding individuals for defrauding the government and common people in multiple ways which include:

  • Under-reporting their income
  • Fabricating information on forms to evade taxes
  • Deliberately failing to submit a tax return or pay due taxes

And fraudsters trick individuals by:

  • Submitting returns using counterfeit Social Security numbers (SSNs)
  • Posing as genuine tax preparers, filing false returns for unsuspecting clients and keeping the refund money

Individuals are severely affected by these types of tax frauds as it disrupts their lives significantly.

About Tax Identity Theft

Stealing SSNs for filing tax returns and claiming undeserved refunds is a common fraudulent tactic. Criminals often misuse SSNs on their W-4 forms to take home the paycheck while the legitimate person receives the tax bill, a fraudulent activity termed as tax identity theft.

Criminals using your SSN not only hack your taxes but also manipulate details to claim a higher refund. It results in the IRS targeting you for discrepancies. Criminals using your SSN for work evade their taxes while you receive the tax bill. Meanwhile, the IRS keeps adding penalties and interest until you can prove you are a victim.

IRS scams aren’t technically tax fraud but unethical nonetheless. Scammers pretending to be from the IRS try to trick you into revealing sensitive details by claiming you owe money. Remember, if due anything, the IRS communicates through the mail, often multiple times through their notices1.

The Impact of Tax Fraud on You

Any forms of tax fraud, be it identity theft or anything else, adversely affect honest citizens. If someone abuses your SSN to file a false return or conceal income, you may face accusations of tax fraud or non-payment of due taxes. Sorting out the issues with the IRS is a formidable task, during which your refund will be withheld.

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Other forms of tax fraud, although not directly impacting you, indirectly affect you as it reduces tax revenue, resulting in the underfunding of public services. The US Government lost approximately $5.7 billion to tax fraud in 20222. So lesser revenue leads to lesser funding for the military, education, Social Security, Medicare, etc.

Evasion or Avoidance?

While avoiding overpaying taxes is legal, evading taxes isn’t. It’s essential to understand the difference. U.S. tax laws provide several ways to lessen tax bills legally, including charitable donations, contributing to retirement plans, claiming tax credit, etc. However, false claims, like claiming five dependents when having none, amounts to evasion, which attracts stiff penalties and potential incarceration.

Here are a few legal ways to reduce your taxes:

  • Exploiting the self-employment tax deduction if you’re self-employed
  • Deducting business expenses from your income if you’re a business owner
  • Funding a retirement plan or Health Savings Account
  • Claiming child tax credit if you have qualifying children
  • Utilizing an education tax credit if you’re financing higher ed
  • Claiming the earned income tax credit (EITC) if your income is low

Common illegal tactics for evading taxes include:

  • Claiming disqualified deductions like misrepresenting personal expenses as business costs
  • Falsifying documents to show lesser income
  • Claiming non-existent tax credits
  • Relocating income or assets to concealed accounts
  • Disguising transactions to conceal income
  • Unreported cash payments for workers

All unlawful tax evasions involve deception.

If you unintentionally reported lesser income or made other errors, you won’t face incarceration, but the IRS will impose penalties. The sooner you rectify the mistake, the lesser would be the penalty and interest amount.

How You Can Prevent Becoming a Victim of Tax Fraud

With the growing ways of becoming a victim of tax fraud, it’s crucial to take several precautionary measures.

Prevent unauthorized access to your SSN to avoid misuse. Store your tax records and important documents securely. Dispose of the sensitive information carefully.

Using tax preparation software with multi-factor authentication ensures the safety of your return information. Ramsey SmartTax is a secure way to file your taxes conveniently at home.

Ensure that your tax preparer is authentic if you’re hiring someone else for your tax return.

While tax fraud is a significant threat, with the right precautions, you can guard yourself against it.

Frequently Asked Questions

What is the difference between tax evasion and avoidance?

Tax avoidance involves lowering your tax bill through legal means, like claiming eligible deductions or credits. Tax evasion is an illegal act where individuals or businesses deliberately avoid paying their true tax liability.

What should I do if I become a victim of tax fraud?

If you fall victim to tax fraud, report it to the IRS and your local police department. You should also alert the three main credit bureaus and consider investing in identity theft protection.

How can I prevent becoming a victim of tax fraud?

Prevent tax fraud by protecting personal information like your SSN, storing tax records securely, and using a reputable and secure tax preparation service. Also, be cautious of any unsolicited communications claiming to be from the IRS.

Steer clear of tax preparers who ask for your signature without letting you review your tax return first. Also, beware of those promising hefty refunds for a higher fee. Take action right away if you get any notice from the IRS concerning your return issues.

In the same way, do not disclose personal details to anyone posing as an IRS representative through calls, texts, or emails. Should anyone call you claiming issues with your IRS role, hang up and contact the IRS yourself to verify.

Indicators and Preventative Measures

If your tax return is rejected due to a pre-existing one with your SSN, alarm bells should ring indicating possible tax identity theft.

Apart from this, you should look out for the following signs of IRS identity theft:

– Receiving IRS mail concerning a tax return you haven’t filed
– Getting an IRS notification about an unknown online account
– Finding out your IRS account has been accessed without your knowledge
– Being informed by the IRS about additional taxes you owe
– IRS claiming you owe tax for a year you didn’t file tax returns
– Obtaining an EIN you never applied for
– Noticing earned income reported by the IRS from an employer you don’t remember working at

6 Actions to Take If You Suspect Tax Fraud

If you’re facing any of these situations, here’s what you should do.

Contact IRS Immediately

If you receive an IRS letter about suspicious activities, notify them without delay and contact the unknown employer mentioned in the letter.

Maintain a Record

Keep a record of your conversations with all involved agencies, personnel, the IRS, the FTC, and the unknown employer.

File an IRS Identity Theft Affidavit

To report a tax fraud involving identity theft, fill the IRS Form 14039 and send it along with your paper tax return.

Continue Paying Your Taxes

Despite being a fraud victim, you’re still liable for your tax duties. If e-filing isn’t possible, submit a paper return to avoid late filing penalties.

Issue a Fraud Alert

Inform one of the credit bureaus (TransUnion, Experian, or Equifax) about the identity theft occurrence, and they’ll put out a fraud alert.

Lodge a Complaint with the FTC

The FTC aids victims recover from identity theft, and will provide you with an identity theft report and recovery plan.

Act Now, Before It’s Late

In 2022, identity theft cases amounted to 5.15 million, showing an increasing trend year on year. This surge indeed paints a menacing picture, but don’t panic yet.

It’s advisable to get identity theft protection for extra security besides these preventative measures. The trusted provider, Zander Insurance, comes recommended for their real-time monitoring, alert system, damage control, and $1 million stolen funds cover. Make your move today to secure your tax returns from potential thieves by contacting Zander.

FAQS

What are the tell-tale signs of IRS identity theft?

The clear signs include unaccounted notices from IRS about a tax return you did not file, earning reports from unknown employers, and unauthorized access or creation of your IRS account.

What should I do if I suspect I’ve fallen victim to tax identity theft?

Report to the IRS immediately, keep records of all your correspondences related to the issue, submit an IRS Identity Theft Affidavit, continue paying your taxes, raise a fraud alert with a credit bureau, and report to the FTC.

How can I protect myself from tax identity theft?

By avoiding dubious tax preparers, verifying any unsolicited contact claiming to be the IRS, and using identity theft protection services like Zander Insurance.