Feb 22

Tips on Avoiding Tax Scams

taxscams Motley Fool author Dayana Yochim is just as eager as the rest of us to get our due from Uncle Sam. But she’s also cautious when it comes to tax tips that sound too good to be true. Check out Yochim’s top tips on tax cheats to look out for:

1. “Instant Refund” Ruse – The most common tax-time pitch is the "instant refund," which gives you access to your refund money to tide you over until the IRS sends the official check. In 2004 (the most recent stats available), one in 10 taxpayers got a short-term refund anticipation loan (RAL), according to the Consumer Federation of America and the National Consumer Law Center. Although RALs are offered by legit businesses, the loan terms rival those of the neighborhood loan shark. On the average refund this year ($2,150), forking over $100 to cover loan costs puts your effective APR at 178%. Add in admin fees and you're looking at a 235% APR! If you really can't wait for your refund check, consider e-filing your tax return. It's interest-free and fast, boasting a turnaround time of three weeks or less. If you prefer the hard-copy filing, you can shave off several days of waiting by having your refund electronically deposited into your bank account.

2. “Zero Wages” and “Form 843 Tax Abatement” - Typical ploys falsely promise to reduce or altogether eliminate your tax bill. The "Zero Wages" and the mysterious "Form 843 Tax Abatement" schemes, for example, encourage filers to falsify information on legitimate IRS forms in the hopes that a blizzard of paperwork will distract the Feds.

3. You Can Run, But… - Other scams encourage taxpayers to illegally hide income in an offshore bank or brokerage or move money into a tax-exempt supporting organization or a donor-advised fund while still maintaining control over the money. (Both no-nos.)

4. Phishing Scams – Beware of ne'er-do-wells posing as IRS agents or other legitimate financial institutions (notifying filers of an audit or outstanding refund) to get taxpayers to reveal personal financial information. Click "delete" ASAP. The IRS doesn't send email.

5. Mailbox Mayhem – Keep a close eye on your mailbox. Christmas for fraudsters starts in January, when information-rich tax-related documents begin to snake through the postal system. According to CNET, about 8% of identity theft cases are linked to mailbox breaches.

6. If in Doubt, Get Help - If you do fall prey to any of these scams or suspect tax fraud, report it to the IRS via Form 3949-A.