Personal Finance

Avoiding Tax Scams

While the Internal Revenue Service may not be your favorite federal agency, criminals posing as IRS representatives are unquestionably the much bigger problem. Here's what to know to protect yourself.

Scammers set increasingly treacherous traps for swindling taxpayers' assets, identities or both. Favorite targets are those most likely to fall for the trickery and least able to afford it: older adults, immigrants and widows or widowers.

Even if you're not in any of these categories, don't let down your guard. Tax scams can happen to anyone. In February, scammers even called the home of the commissioner of the Connecticut Department of Revenue Services, the state's head taxation official. As Forbes blogger Kelly Phillip Erb wrote while recommending that all taxpayers be on high alert : "It's tax season. That, unfortunately, also means that it's fraud season."

The current popular scam goes something like this: Someone claiming to represent the IRS or the U.S. Treasury Department calls or emails claiming that you owe money, are in general tax-related trouble or must take some immediate action (usually send them money) - or else.

Callers may also know a lot about you: your name and those of family members, a portion of your Social Security number or additional contact information. Often, scammers stole such information via Internet phishing .

Differentiating a fake IRS representative from the real deal may at first seem hard. One of your key defenses: Know how the U.S. tax agency actually engages in legitimate queries and, just as important, how it does not.

If you defraud the U.S. government, you may indeed incur fines, penalties and, in extreme cases, even jail time. None of these happens in an out-of-the-blue instant, though. Here are five actions the IRS will never take at the initial stages of a tax problem:

  1. Call to demand immediate payment or call about taxes you owe without first mailing you a bill.
  2. Demand that you pay taxes without giving you the opportunity to question or appeal the amount owed.
  3. Require you to use a specific payment method for your taxes, such as a prepaid debit card.
  4. Ask for your credit or debit card numbers over the phone.
  5. Threaten to bring in local police or other law enforcement to arrest you.

If you or a loved one receives a call involving any of the above tactics, you can bet it's a scam. Your best responses:

  • Hang up. Just as you never politely converse with a burglar in your home or a thug on the street, there's absolutely no need to stand on formalities here.
  • Report the call. Notify the IRS to help prevent others from succumbing to the scam. If possible, note the caller's number.

Unfortunately, for every tax scam averted, others pop up. The IRS list of top tax schemes spans phone and Internet fraud to fake documents and crooked tax return preparers. To stay on top of the latest news, regularly visit the IRS tax scam/consumer alert page or talk to your financial advisor with questions and concerns.

We all benefit when we stand together against tax scams.

Follow AdviceIQ on Twitter at @adviceiq.

Sheri Iannetta Cupo, CFP, is a principal of SageBroadview Financial Planning with offices in Morristown, N.J., and Farmington, Conn. The SageBroadview blog covers a wide range of financial planning and life topics.

AdviceIQ delivers quality personal finance articles by both financial advisors and AdviceIQ editors. It ranks advisors in your area by specialty, including small businesses, doctors and clients of modest means, for example. Those with the biggest number of clients in a given specialty rank the highest. AdviceIQ also vets ranked advisors so only those with pristine regulatory histories can participate. AdviceIQ was launched Jan. 9, 2012, by veteran Wall Street executives, editors and technologists.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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