How to Identify Tax Scams and Avoid Fraudulent Tax Relief Companies

Last updated on November 11, 2024

Tax scams are increasingly sophisticated, targeting individuals with promises of tax relief, exaggerated refunds, or threats from supposed government agents. Fraudulent companies also exploit the complexities of tax relief programs, making it vital to understand the warning signs and strategies to avoid them. This guide offers insights into identifying scams and steering clear of fraudulent tax relief companies.

Common Types of Tax Scams

1. Phishing and Email Scams

Scammers use phishing emails or texts claiming to be from the IRS or tax relief companies, luring victims to click malicious links or submit personal information. These communications often promise tax relief or claim you owe back taxes but are designed to steal sensitive data.

How to Avoid: The IRS never initiates contact via email or text. Always verify communications through the IRS website or contact them directly.

2. IRS Impersonation Calls

Fraudsters impersonate IRS agents, threatening victims with arrest or lawsuits unless they pay immediately through wire transfers or gift cards. They may also promise to negotiate tax debts if you make upfront payments.

How to Avoid: The IRS primarily contacts taxpayers by mail and does not demand payments through gift cards or cryptocurrency.

3. Offer in Compromise (OIC) Scams

Scam companies falsely claim they can secure an Offer in Compromise—a legitimate IRS program allowing eligible taxpayers to settle their debt for less than owed—for anyone, often charging hefty upfront fees without delivering results.

How to Avoid: Use the IRS’s free OIC pre-qualifier tool to determine eligibility before paying for services. Only consult with accredited tax professionals such as CPAs or enrolled agents.

4. Fake Tax Relief Programs and Credit Scams

These scams offer nonexistent government credits or tax relief packages to reduce debt, but they require you to share personal information. Once obtained, scammers use this data for identity theft.

How to Avoid: Always verify tax relief programs on official websites like IRS.gov or through verified tax advisors.

5. Ghost Tax Preparers

These fraudsters prepare returns for a fee but refuse to sign them, leaving you responsible for any inaccuracies. In many cases, they fabricate deductions to inflate refunds, which can result in penalties for the taxpayer.

How to Avoid: Ensure your tax preparer has a valid Preparer Tax Identification Number (PTIN), as the IRS requires.

Identifying Fraudulent Tax Relief Companies

1. Red Flags to Watch Out For:

Guaranteed Results: Be cautious of companies promising unrealistic outcomes, such as wiping out your tax debt entirely without understanding your financial situation.
Upfront Fees: Legitimate companies typically offer free consultations and do not require total payments upfront. Companies demanding money before providing services are likely fraudulent.
Money-Back Guarantees: Many scam companies promise refunds if they fail to secure relief but refuse to return the money or vanish entirely.

2. Signs of a Legitimate Tax Relief Company:

Accreditation: Look for affiliations with organizations like the Better Business Bureau (BBB) or the American Society of Tax Problem Solvers.
Transparency: Reputable companies disclose their fees and success rates upfront and have experienced tax professionals, such as CPAs or attorneys.
Investigative Approach: Genuine companies will analyze your tax situation thoroughly before offering solutions.

Steps to Avoid Tax Relief Scams

Research the Company: Look for customer reviews and complaints on trusted platforms like the BBB.
Verify Credentials: Ensure the company employs licensed tax professionals.
Communicate Safely: Access the IRS and other government resources through official websites. Do not click on unsolicited email links or provide personal details over the phone.
Report Suspicious Activity: If you suspect a scam, report it to the Treasury Inspector General for Tax Administration (TIGTA) or the IRS’s phishing@irs.gov email.

FAQs

1. What should I do if I receive a suspicious call from someone claiming to be from the IRS?

Hang up immediately and report the call to the TIGTA. The IRS initiates contact through mail and does not make threatening phone calls demanding immediate payments.

2. Are all tax relief companies scams?

Some companies provide legitimate tax relief services, such as installment agreements and Offer Compromise applications. However, due diligence is essential—look for accreditation and avoid companies that ask for full payment upfront.

3. Can the IRS email me to request personal information?

No, the IRS does not request personal or financial information through email. Always verify such requests directly with the IRS.

Conclusion

Tax scams are becoming increasingly prevalent, exploiting fear and confusion around tax regulations. Identifying red flags such as unsolicited emails, promises of guaranteed results, and upfront fees is essential to protecting yourself from fraud. Stay vigilant by working with accredited professionals and verifying all communications through official channels. By staying informed, you can avoid scams and find legitimate help to manage your tax obligations safely.