Don't Get Taken by a Tax Scam
March 24, 2006— -- I doubt you need me to remind you that tax day is right around the corner. But I do want to remind you about some problems you could face because of other peoples' greed or your own missteps. Tax time can be a drag, but if you're not careful, you can make things even harder on yourself.
Rapid "Refunds"
If you're one who doesn't mind tax time because you love getting a refund, a few words of caution: Many accountants and tax preparation firms offer what they call rapid-refund loans or refund-anticipation loans. They sometimes put the word "loan" in smaller print. These companies hype the fact that you can get your refund money in 24 to 48 hours. But they downplay the fact that it'll cost you a lot of money.
You see, when you participate in one of these programs, the money you're getting is not coming from the IRS. It's a loan from the tax prep company. With fees and interest, this loan can cost you up to 30 percent of your refund. Expressed as an annual percentage rate, or APR, it can be as much as 116 percent! Say you're expecting a $1,500 refund -- that's $450 that you're giving away for no real reason. And that's just the cost of the loan. The price of preparing your return is not included in that!
Extra Services
Sometimes it's best to stick with specialists for your various financial needs. One state has just filed suit against a nationwide tax prep firm, saying the company steered its tax clients into expensive Individual Retirement Accounts. The lawsuit says the IRAs were bound to lose money because of hidden fees and low interest rates, and it also alleges that 85 percent of customers' accounts have decreased in value so far. Listen, it's a great idea to use your tax refund to start a retirement account, but it's best to carefully research the financial adviser and type of account before committing.
Tax Phishing
For years we've all received "phishing" e-mails that look like they come from banks and ask us for our personal financial information. If you fell for it, the bad guys might have used your data for identity theft. Of course, if you didn't have an account at the bank named in the e-mail, you were bound to be suspicious.
Now scammers have hit on the perfect solution for themselves: They're sending fake e-mails that look like they're from the IRS! After all, we all have to pay taxes. Once again, they're asking for sensitive financial information. And to folks who have filed their taxes online, an e-mail from the IRS seems pretty plausible. Now here this! The IRS says it does not communicate with citizens via e-mail. Period.
Not Itemizing? Shame on You
I admit it. In a sick sort of way, I enjoy getting my tax stuff together. I don't actually do my taxes. No, no, no, no, no. That's a special form of torture that I leave to the professionals. I'm talking about gathering together all the receipts and bills and paystubs I need to claim every possible deduction I'm entitled to. It's my version of clipping coupons, or bargain shopping. A wise accountant once explained it to me this way: Say you're in the 27 percent tax bracket. If you itemize, then for every $100 of deductions you can claim, you save $27 on your taxes. Of course, not everybody HAS stuff to itemize, but if you do and you still don't itemize, shame on you.
Getting Audited
If you think being taxed is a drag, being audited is devastating. It's unpleasant even for people who have nothing to hide. You usually have to hire accountants and lawyers to help you prove your innocence. That's expensive. And even if you're cleared, the IRS doesn't reimburse you for the time and money you were forced to spend. Whatever happened to innocent until proven guilty?
The IRS is the largest law enforcement agency in the United States, bigger than the police departments of New York City, Los Angeles, Chicago, Detroit and Philadelphia combined. That's what you're up against.
Watch Out for Fraudulent Tax Strategies
The IRS is warning that some unscrupulous tax preparers may claim they can save you money on your taxes if you agree to participate in some shady strategies. Run the other way if you hear the following claims: "The income tax is unconstitutional because the 16th amendment was never ratified." "Wages are not taxable." "You can start your own religion and avoid taxes." And on and on. The worst part is, even if you get bad advice, you could be prosecuted for tax evasion. The IRS has more information on tax fraud scams here here.