Avoid these tax scams like the plague

Taking Back the ID: Identity theft prevention analysis

Duke Winston thought of himself as being very astute and knowledgeable when it came to current events, especially when they were related to the business world. He had two degrees in business, worked in the public relations department of a Fortune 500 company and was a faithful reader of The Wall Street Journal and other business periodicals. But he wasn't ready for what was going to happen next.

One day he received a telephone call supposedly from a U.S. Internal Revenue Service agent. The caller tried to establish his credibility by using a fake name and bogus IRS badge number. He was cordial but aggressive when he told Duke he owed the IRS more than $1,000. He said Duke needed to pay to avoid arrest. The caller told Duke to buy a prepaid debit card and call him back with the card's number. Duke followed the caller's instruction and succumbed to the scam.

Telephone tax scams

Though this particular case is fictional, it describes a very real scam that ranks near the top of the IRS's "Dirty Dozen" list of tax scams for 2015. The IRS views it as one of the worst impersonation scams in its history.

According to the Feb. 15 IRS article Phone Scams Continue to be Serious Threat, Remain on IRS ‘Dirty Dozen' List of Tax Scams for the 2015 Filing Season, the scammers call individuals of all income levels and backgrounds but tend to "prey on the most vulnerable people, such as the elderly, newly arrived immigrants and those whose first language is not English."

They typically create an atmosphere of complete panic which, when paired with threats, catches victims off guard and frightens them to make payments.

This tax scam is not new. According to a March 12 New York Daily News article, IRS official says he was targeted by fake agents who have taken $15.5M from taxpayers tricked into paying, by Dan Friedman, Timothy Camus, a deputy inspector general for tax administration for the Treasury Inspector General for Tax Administration office (TIGTA) says the IRS has received reports of more than 366,000 people falling victim to the scam since October 2013. "At least 3,000 people have fallen for the ruse since 2013," Camus testified [to the Senate Finance Committee], "and the scam has claimed victims in almost every state." Fraudsters have conned victims out of a total of $15.5 million, with one victim losing more than $500,000.

The key to curtail this scam and others is to educate the community, which the IRS is trying to do by alerting the public with its annual list of dirty tax scams, among other announcements.

These fraudulent telephone calls usually peak during the tax-filing season but continue after the April 15 deadline. Fraudsters have elicited payments by threatening victims with deportation, driver's license revocation or criminal charges. They alter their caller ID numbers to appear to be IRS employees. If victims aren't at home, fraudsters typically leave "urgent" callback requests.

The IRS says that, in addition to demanding a payment, "These criminals try to scare and shock you into providing personal financial information on the spot while you are off guard." This illustrates how skillful the scammers are in milking everything of value out of their victims and helps to explain why the FBI has stated that identity theft has been the No. 1 fraud problem over the past 10 years.

According to the IRS article, the agency will never:

• "Call to demand immediate payment, nor will the agency call about taxes owed without first having mailed you a bill.
• "Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
• "Require you to use a specific payment method for your taxes, such as a prepaid debit card.
• "Ask for credit or debit card numbers over the phone.
• "Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying."

The IRS provides advice in the article if you receive a telephone call from a caller saying that he works for the IRS and demands money. Hang up and:

• If you know or think you owe taxes, call the IRS at 800-829-1040.
• If you don't think you owe money, report the incident to the Treasury Department inspector general for tax administration at 800-366-4484 or at www.tigta.gov.
• Contact the Federal Trade Commission and use its "FTC Complaint Assistant" at FTC.gov. Add "IRS Telephone Scam" to the comments of your complaint.

The IRS provides more information about tax scams at YouTube, and Tumblr. To learn more about reporting a tax scam, go to www.irs.gov and type "scam" in the search box.

Phishing tax scams

In the Jan. 23 article Phishing Remains on the IRS ‘Dirty Dozen' List of Tax Scams for the 2015 Filing Season, the IRS alerted the public about tax phishing scams initiated by fraudsters to con victims out of their personally identifiable information (PII) and use it for identity theft purposes.

The phishing tax schemes also aren't new, and they usually peak during the tax-filing season but can occur anytime throughout the year. Victims receive unsolicited emails or popups when they click on links on contaminated or fake websites that pose as legitimate sites. Of course, the scammers' goal is to convince victims to give up their PII.

Unlike a telephone tax scam in which individuals don't have time to stop and think, people who encounter phishing tax scams usually do have time to question the motives behind the fraudulent email messages. The IRS offers the following advice about phishing tax schemes:

• Report any unsolicited email that appears to be from the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), to phishing@irs.gov.
• The IRS generally doesn't initiate contact with taxpayers by email, text messages and social media channels.

Tax refund scam

In the March/April 2014 and May/June 2014 issues of Fraud Magazine I wrote two feature articles on tax refund fraud. (See Identity tax refund fraud, part 1 and part 2.) "60 Minutes" also featured this topic in January, and the IRS addressed and updated the scam in its Jan. 26 article, Identity Theft a Major Concern on the IRS Annual ‘Dirty Dozen' List of Tax Scams to Avoid.

Tax refund fraud/identity theft happens when a fraudster steals your Social Security number (SSN) and files a false tax return on your behalf to collect a refund. In 2014, fraudsters collected $5.8 billion with this scheme. The IRS estimates that the losses could hit $16 billion by 2016.

Fraudsters can steal your SSN via phishing schemes, data breaches and over the telephone, among others. You won't know until you file your tax return, and the IRS tells you you've already filed. Then you could spend months trying to convince the IRS that you're a victim of identity theft tax refund fraud.

In its article, the IRS says: 

• "As a result of these aggressive efforts to combat identity theft from 2011 through October 2014, the IRS has stopped 19 million suspicious returns and protected over $63 billion in fraudulent refunds.
• "In Fiscal Year 2014, the IRS initiated 1,063 identity theft-related investigations. Criminal Investigation enforcement efforts resulted in 748 sentencings as compared to 438 in FY 2013, an increase of 75 percent. Our incarceration rate rose to 87.7 percent as compared to 80.6 percent in FY 2013. The courts imposed significant jail time with the average months to serve in FY 2014 at 43 months as compared to 38 months in FY 2013 with the longest sentencing being 27 years."

To help avoid this type of identity theft the IRS offers the following advice:

• "Don't carry your Social Security card or any documents that include your Social Security number … or Individual Taxpayer Identification Number (ITIN).
• "Don't give a business your SSN or ITIN just because they ask. Give it only when required.
• "Protect your financial information.
• "Check your credit report every 12 months.
• "Review your Social Security Administration earnings statement annually.
• "Secure personal information in your home.
• "Protect your personal computers by using firewalls and anti-spam/virus software, updating security patches and changing passwords for Internet accounts
• "Don't give personal information over the phone, through the mail or on the Internet unless you have initiated the contact or you are sure you know who you are dealing with." 

More help for the community

I hope you'll share this information with your family, friends and clients and include it in your outreach programs. I'd like to see ACFE chapter members contact their local TV stations before each tax season to see if they can televise segments on tax refund fraud and other income tax scams to warn the public. We must step up our efforts to educate the public about these problems.

As you can see, cybercriminals take advantage of any opportunity to develop schemes to trick consumers and rob them of their resources. Even though they have the upper hand, an educated community will help curb the damage.

Please contact me if you have any identity theft issues you'd like me to research and possibly include in future columns or if you have any questions related to this column or any other cyber security/identity theft issue. I don't have all the answers, but I'll do my best to help. Stay tuned!

Robert E. Holtfreter, Ph.D., CFE, CICA, CBA, is distinguished professor of accounting and research at Central Washington University in Ellensburg, Wash. He’s also on the ACFE’s Advisory Council and the Editorial Advisory Committee.

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