Note: I am not suggesting or supporting any of these concepts. My point is to educate people about what preparers and consumers should be concerned about during the upcoming tax season. Tax fraud is a large problem.
There is something unique about the opportunity that tax season presents to fraudsters. In general, the individuals receiving refunds are more likely to be less sophisticated with their finances. Folks with complicated returns are less likely to get a refund, all things being equal. But lower-income individuals whose returns are limited to a w-2, a child care tax credit, and an EIC are prime targets.
1) Identity theft: It can take place from anywhere (although Florida seems to be an attractive location). If a person can find or buy a social security number, he or she has a chance to file prior to the actual consumer does. Using a prepaid card can add anonymity to their effort. The IRS makes it even easier, because there is no safeguard in place to prevent a multitude of refunds being sent to a single address. Locations where personal information is most vulnerable include hospitals, schools, and banks. All it takes is one ill-intentioned employee.
2) Telephone scams: You need to settle a tax debt! You have a refund due! Now is your chance to act. We can take a credit card or you can wire transfer money.
3) Phishing scams. An email links a preparer to a false representation of an IRS site. The site prompts the consumer to enter personal information into a form.
4) Double-charging: Preparers charge twice, first for the service and then secondly when the refund arrives.
5) The highest refund scam: Preparers sometimes claim the ability to produce a higher tax refund for their clients: How often do you see a sign that promises the highest refund, or one that promises to produce an EIC beyond the maximum sum? Those promises could be too good to be true. Still, the come-on is compelling. When a person hears that one preparer can bring a refund of $6,000 even though no other preparer believes that the filer is due more than $3,000, the opportunity is compelling. But the catch is that these preparers often want to be compensated for their difference-making skills. In the end, the math looks like a net positive: pay $1,000 in tax prep fees but get a much larger refund.
A few years back, our low-income tax clinic worked on behalf of a woman who was defrauded in one of these schemes. Most likely, she should have been leery when she was told that she could only pay for her tax prep services in the parking lot outside of a local Wal-Mart. The preparer escorted her to the check-cashing station and then took payment once they were outside in the parking lot. If it's too good to be true....
6) Filing a false return: A preparer files a return without the permission of a filer. Usually, the client asks for an estimate of the cost of services and the likely refund that he or she might receive. When the client opts to use a different preparer, the preparers goes ahead and files a return. As with other instances of tax preparer fraud, the preparer has to commit forgery.