Tax Season, Fraud Season

Early spring is a time for change, bringing with it celebrations, weather changes and, most beloved of all, taxes. Each year, taxpayers can expect adjustments that may complicate or ease the burden of their civic duty. The 2023 tax season for the 2022 tax year is no different and ends many pandemic-focused credits and adjustments for economic inflation. But beware, as scammers are always seeking to take advantage during this stressful time for many people. 

One of the most important pieces of information of which taxpayers should be aware is that the expanded tax credits and deduction revert to their 2019 (pre-COVID-19) amounts. The IRS warns that affected taxpayers should expect significantly smaller returns because of such changes. The Child Tax Credit (CTC), Earned Income Tax Credit (EITC) and Child and Dependent Care Credit will be less. And unlike COVID-19 years in 2020 and 2021, there were no new stimulus or Economic Impact payments for 2022, so there should be no expectation of an additional payment or Recovery Rebate Credit.

Fraudsters may rely on the average citizen not knowing such updates and use misinformation to manipulate their victims. For example, the IRS warned employers to beware of third parties encouraging incorrect information, such as employee retention credit claims. These third parties might try to charge hefty advanced fees or a fee that relies upon the amount of the refund, as well as failing to advise taxpayers that wage deductions claimed on the business' federal income tax return must be reduced by the amount of the credit. If the business filed an income tax return deducting qualified wages before it filed an employment tax return claiming the credit, the business should file an amended income tax return to correct any overstated wage deduction. The IRS states, “Businesses should be cautious of schemes and direct solicitations promising tax savings that are too good to be true. Taxpayers are always responsible for the information reported on their tax returns. Improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest.” 

Additionally, the IRS recommends filing early, as it minimizes the chance of a bad actor filing someone’s information before them. Filing early also helps initiate an expected refund sooner. However, they do caution, “Although the IRS issues most refunds in less than 21 days, the IRS cautions taxpayers not to rely on receiving a 2022 federal tax refund by a certain date, especially when making major purchases or paying bills. Some returns may require additional review and may take longer to process if IRS systems detect a possible error, the return is missing information or there is suspected identity theft or fraud.”  

Protecting Sensitive Information During Tax Season 

According to the 2022 Annual Report from the Identity Theft Tax Refund Fraud Information Sharing Mission & Analysis Center (the IDTTRF-ISAC or simply, the ISAC) — a partnership between the IRS, private-sector tax industry and individual states — nearly 7.8 million reports of suspicious activities were filed in 2022. WBy comparison, the Federal Trade Commission’s (FTC) Consumer Sentinel Network reported over 5.7 million consumer fraud reports in 2021, totaling a fraud loss of $5.9 billion dollars;  25% of all reports were Identity theft. The ISAC foresees the stolen data be repurposed in tax fraud in future years.

Taxpayers should be careful with whom they entrust their information. Trustworthy and reputable people and platforms should be prioritized over affordability. The IRS requires that if someone else prepares your return, they must sign the document and enter a valid Preparer Taxpayer Identification Number (PTIN), which can be found in the searchable IRS database. The IRS places the burden of tax fraud on the taxpayer primarily, so if a tax preparer refuses to sign or enter their PTIN, beware. Never sign blank or incomplete tax forms. Unscrupulous tax return preparers may also insist on payment in only cash, not provide a receipt, invent extra income to qualify tax credits, claim fake deductions and direct refunds into their bank account. 

Additionally, fraudsters regularly use mail, telephone or email resources to scam individuals, businesses, payroll and tax professionals. For instance, taxpayers have received phishing emails from the Taxpayer Advocacy Panel (TAP), a real volunteer board, about their tax refund. However, TAP advises the IRS on systemic issues affecting taxpayers and never requests, and does not have access to, any taxpayer’s personal and financial information. Remember: The IRS will not initiate contact with taxpayers by email, text messages or social media to request personal or financial information. They offer advice on How to know it’s really the IRS calling or knocking on your door on their website. 

For those that are not anticipating a refund and might have to pay more than expected, the IRS reminds taxpayers to watch out for those promising lofty IRS settlements for “pennies-on-the-dollar” or limited, time-sensitive offers. While the IRS does have an Offer in Compromise (OIC) program, “OIC Mills” will mislead people into thinking they might be eligible for the program when they are not, as well as charging exorbitant fees. Not only does it cost taxpayers their hard-earned money, but it wastes their valuable time as well.  

Finally, the regular tax season may come to a close for many of us, but fraud season never ends. PII and tax information should be vigilantly guarded all year. Computer security and physical access should be reviewed and assessed all year. As fraud risk management has taught us CFEs, the work never stops because the fraudsters never sleep. Tax scammers can come at any time of the year, not just as we crawl closer to the bright line in April.