Tax Fraud Awareness

The IRS, taxpayers and tax preparers share a common enemy: identity thieves. We all have a part to play in the fight against tax-related identity theft . Your role starts by learning the mechanics and warning signs. From there, taxpayers can take proactive steps to protect their data online and at home.

Understand How Tax Fraud Happens

Dishonest individuals may steal taxpayers’ personal and financial information from sources outside the IRS, such as social media accounts where people tend to share too many details or bogus phishing emails that appear to come from the IRS or a bank. Once they obtain an unsuspecting taxpayer’s data, thieves may use it to file fraudulent federal and state income tax returns, claiming significant refunds.

Paperless e-filing facilitates these scams: Thieves submit returns electronically, based on falsified earnings, and receive refunds via mail or direct deposit. Sure, the IRS maintains records of wages and other types of taxable income reported by employers, but they don’t usually match these records to the information submitted electronically before issuing refund checks. By the time the IRS notifies a victim that it’s received another tax return in his or her name, the thief is long gone and has already cashed the refund check.

In addition to refund fraud , thieves may use stolen personal information to access existing bank accounts and withdraw funds — or open new ones without the taxpayer’s knowledge. Criminals are becoming increasingly sophisticated and their ploys more complex, making identity theft harder to detect.

Recognize the Warning Signs

Taxpayers are the first line of defense against these scams. The IRS lists the following warning signs of tax-related identity theft:

Your electronic tax return is rejected. When the IRS rejects your tax return, it could mean that someone else has filed a fraudulent return using your Social Security number. Before jumping to conclusions, first check that the information entered on the tax return is correct. Were any numbers transposed? Did your college-age dependent claim a personal exemption on his or her tax return?

You’re asked to verify information on your tax return. The IRS holds suspicious tax returns and then sends letters to those taxpayers, asking them to verify certain information. This is especially likely to happen if you claim the Earned Income tax credit or the Additional Child tax credit, both of which have been targeted in refund frauds in previous tax years. If you didn’t file the tax return in question, it could mean that someone else has filed a fraudulent return using your Social Security number.

You receive tax forms from an unknown employer. Watch out if you receive income information, such as a W-2 or 1099 form, from a company that you didn’t do work for in 2016. Someone else may be using the phony forms to claim a fraudulent refund.

You receive a tax refund or transcript that you didn’t ask for. Identity thieves may test the validity of stolen personal information by sending paper refunds to your address, direct depositing refunds to your bank or requesting a transcript from the IRS. If these tests work, they may file a fraudulent return with your stolen data in the future.

You receive a mysterious prepaid debit card. Identity thieves sometimes use your name and address to create an account for a reloadable prepaid debit card that they later use to collect a fraudulent electronic refund.

Take Preventive Measures

You may wonder how many taxpayers file electronic vs. paper returns. “There are 150 million households that file federal and state tax returns involving trillions of dollars…. More than 90% of these tax returns are prepared on a laptop, desktop or even a smartphone — whether they’re done by an individual or a tax preparer. This is a massive amount of sensitive data that identity thieves would love to get access to.… With 150 million households, someone right now is clicking on an email link they shouldn’t, or skipping an important computer security update, leaving them vulnerable to hackers,” said IRS Commissioner John Koskinen in a recent statement about the Security Summit Group. (See “IRS Creates Security Summit Group” above.)

How can you actively safeguard your personal data online and at home? Here are four simple ways to thwart tax-related identity theft:

1. Keep your computer secure. Simple, cost-effective security measures add up. For example, use updated security software that offers firewalls, virus and malware protection and file encryption. Be stingy with personal information, giving it out only over encrypted websites with “https” in the web address. Also back up computer files regularly and use strong passwords (with a combination of capital and lowercase letters, numbers and symbols).

2. Avoid phishing and malware scams. Be leery of emails you receive from unknown sources. Never open attachments unless you trust the sender and know what’s being sent. Don’t install software from unfamiliar websites or disable pop-up blockers.

3. Protect personal information. Treat personal information like cash. Don’t carry around your Social Security card in your wallet or purse. Be careful what you share on social media — identity thieves can exploit information about new car or home purchases, past addresses, vacations and even your children and grandchildren. Keep old tax returns in a safe location and shred them before trashing.

4. Watch out for scammers who impersonate IRS agents. IRS impersonators typically demand payment and threaten to arrest victims who fail to ante up. The Federal Trade Commission recently issued an alert about police raids on illegal telemarketing operations in India that led to the indictment of dozens of IRS impersonators. Remember: The IRS will never call to demand immediate payment, nor will they call about taxes you owe without first mailing you a bill.

Another simple way to prevent someone from filing a fraudulent return is simply to file your return as soon as possible. The IRS begins processing tax returns on January 23. If you file a tax return before would-be fraudsters do, their refund claims are more likely to be rejected for filing under a duplicate Social Security number.

Join the Fight

The deadline for filing your 2016 return is fast approaching. The IRS expects more than 70% of taxpayers to receive a refund for 2016, and it’s on high alert for refund fraud and other tax-related identity theft schemes. You can help the IRS in its efforts to fight tax fraud by watching for these warning signs and safeguarding your personal and financial information.

Additional resources for business accounting tips are available here


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he 2016 tax filing season has begun, with W-2s arriving in the mail and some confusion arising from news of a refund delay.

While most people will be minimally impacted by changes this year, one of the biggest additions is aimed at helping low-income families.

The California earned income tax credit is entering its second year. The credit applies to people who earn $6,717 or less with no children up to $14,161 with two or more children. To help you get the most out of your taxes , we asked Aaron Martinez, a tax expert with H&R Block since 1998, and Andrew Nelsen, a certified public accountant in Fountain Valley, for tips ahead of the April 18 filing deadline.

REFUND DELAY

Some who file early may be in for a surprise. Those claiming the EITC or a child tax credit – an estimated 30 million taxpayers – will have their refund held until Feb. 15.

“We’re telling everyone to file normally,” Martinez said. “They just have to wait a little bit longer to get their refund.”

The delay, created by the Protecting Americans From Tax Hikes (PATH) Act of 2015, is meant to prevent fraud.

“Those two credits are target credits for identity thieves and fraudsters . The IRS wants to make sure that the W-2s that are coming in are correct and that they have time to make sure there is no theft,” Martinez said.

The IRS estimates that as many as 26 percent of EITC claims may be paid erroneously in 2015. “Some of the errors are unintentional, caused by the complexity of the law, but some of the claims are intentional disregard of the law,” the agency said.

For people who need the refund sooner, H&R Block is offering a $1,250 refund advance, a no-interest loan that’s repaid when the refund is issued by the IRS.

WHAT's NEW

The personal exemption has been increased to $4,050. But that amount is phased out for taxpayers at higher income levels. Similarly, those with higher adjusted gross income might not be able to get the full value of their deductions.

The alternative minimum tax is still around, but the exemption has increased to $53,900 for single taxpayers, $83,000 for those married filing jointly and $41,900 for married filing separately.

People who have been issued an individual taxpayer identification number, or ITIN, instead of a Social Security number may have to renew it before filing their tax returns. The IRS says current ITINs will no longer be valid if they weren’t used at least once in the last three years or if the number was issued before 2013.

Make sure you have last year’s tax return handy when you prepare to file your taxes this year.

“Taxpayers who are changing tax software products this filing season will need their adjusted gross income from their 2015 tax return in order to file electronically,” the IRS said. “The electronic filing PIN is no longer an option.”

That, too, is part of the agency’s attempt to battle tax fraud and identity theft.

CLAIM ALL YOUR CREDITS

Martinez said there are a lot of deductions people forget to take. They include:

--Charitable contributions

--Mortgage interest, property taxes and mortgage insurance

--Employee expenses such as mileage and phone bills

--Education costs: Schools issue a tuition statement, form 1098-T, for eligible deductions

--Filing status: For example, a single mother with a child can file as head of household

--Caring for parents

--Even if you have a degree, the IRS offers a lifetime learning credit of up to $2,000 annually

--Delivery drivers, especially those working for Uber, Lyft and DoorDash, should keep track of miles, oil changes and vehicle repairs as business expenses

PATH ACT

“A big change this year is the PATH Act. This act made some tax changes permanent and made some expire,” Martinez said.

Under the act, the American Opportunity Education Tax Credit, which gives undergraduate students up to $2,500 in tax credits, and some other tax breaks were made permanent.

This is the last year for private mortgage insurance, mortgage debt forgiveness, a tuition and fees deduction, and non-business energy credits.

“Next year is the year that could really be topsy-turvy,” said Nelsen. “Not a whole lot changed this year.”

AVOID SCAMS

To prevent fraud, file your taxes as early as possible, Martinez urges.

The IRS will not ask for your credit card or send the sheriff to your house. Anyone threatening to do so is likely a scammer.

Anyone impersonating the IRS can be reported online at ftccomplaintassistant.gov or by calling 800-366-4484.

EXTENSIONS

Taxpayers who need more time to file can request an extension.

“Getting a filing extension avoids the late filing penalty, but it doesn’t avoid the late payment penalty,” said Barbara Weltman, a consultant and author of books on taxes, law and finance.

So the advice from tax experts: To avoid the late payment penalty, estimate the amount due and pay it before the April 18 deadline. But even with that, you won’t be able to avoid interest on payments made after the deadline.

AFFORDABLE CARE ACT

While Republicans seem committed to repealing the Affordable Care Act, it remains to be seen what might replace it.

In the meantime, people who do not have health insurance should be prepared to pay more this year as penalties for those without coverage have risen.

The penalty for not having insurance is $695 per uninsured adult or 2.5 percent of household income over the filing threshold – whichever is greater. In 2015, it was $325 per uninsured adult or 2 percent of household income.

Enrollees with insurance through the state’s health exchange, Covered California, have to file a 1095-A form with their taxes.

To help with the cost, there are 30 exemptions available for people who are uninsured, according to Martinez.

“It’s in its third year. The first year people didn’t really understand it,” Nelsen said. “The second year penalties really started kicking in, and people started to catch on, so I know it’s on people’s mind this year.”


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