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What Is Tax Fraud?

Usually, the words tax and fraud conjure up images of delinquent celebrities like Willie Nelson going back on tour to pay for $16.7 million in taxes he never coughed up. Or Martha Stewart sitting in jail because she decided she didn’t need to pay taxes in New York because she wasn’t there much. We’re used to celebrities committing tax fraud—but this crime can hit a lot closer to home too. Regular, everyday people sometimes commit tax fraud—and get hurt by it—all the time.

What Is Tax Fraud?

Anytime someone purposely deceives the government to get out of paying taxes, they’re committing tax fraud. It doesn’t have to be some guy with a bajillion dollars. A lot of people think fudging on their taxes is normal. Everybody cheats a little on their taxes, right? Well, maybe, but that’s fraud.

But it’s not always about avoiding payment. Another side of tax fraud is filing fake returns to get a bogus refund or using someone else’s ID to avoid paying income taxes.

Types of Tax Fraud

There are a lot of different ways to deceive the government and steal from people. Let’s take a look at some of the ways thieves, scammers and white-collar criminals (and even some otherwise law-abiding people) skirt the law.

Criminals defraud the government and everybody by:

  • Reporting they had less income than they did
  • Lying on documents to get out of paying taxes
  • Purposely refusing to file a tax return or pay their taxes

Criminals defraud individuals by:

  • Using a false Social Security number (SSN) to file
  • Pretending to be a legit tax preparer, filing false returns for unsuspecting customers and pocketing the refund money

All these types of tax fraud hurt honest people. But the second group is definitely more painful because those are real people often getting their lives upended.

Tax Identity Theft

Thieves often use stolen SSNs to file a tax return and run off with a tax refund they didn’t earn. Or they use someone else’s SSN on their W-4 form at work, so they take home the paycheck and someone else gets the tax bill. This is also called tax identity theft.

Often the criminals using your SSN also mess up your taxes, reporting all sorts of fake information (like you have seven dependents or suffered losses in the stock market) to get a bigger refund. Then, because the IRS only knows you by your SSN, they come after you when the info doesn’t add up!

With the fraudsters using your SSN for work, they get to avoid paying taxes on their income and you get the IRS knocking on your door for underreporting your income—and they’ll keep tacking on fees and interest until you prove you’re a victim of fraud.

IRS scams aren’t technically tax fraud—but they’re scummy all the same. Fraudsters call, text or email you pretending to be from the IRS. They’ll say you owe the IRS money to try to get you to share your sensitive info. Don’t fall for it! If you owe money, the IRS will contact you through the mail—often several times with what they call notices.1

How Tax Fraud Affects You

Whether it’s tax identity theft or plain old fraud, tax fraud hurts law-abiding citizens. If someone uses your SSN to file a false return or hide income, the consequences to you are pretty obvious. You’ll probably be accused of tax fraud yourself instead or get in trouble for not paying enough! And you’ll miss out on your refund until the mess gets straightened out—which will be a headache-and-a-half because it’s the IRS.

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That all makes sense. But you may be wondering, How do the other kinds of tax fraud hurt me? They’re stealing from Uncle Sam, not me. That’s true, but every taxpayer benefits from the services their taxes pay for.

In 2022, the federal government lost out on $5.7 billion from tax fraud.2 If a bunch of crooks don’t pay their taxes and get fraudulent tax refunds instead, the government has less tax revenue to fund the services we all rely on. So IRS fraud could lead to underfunding in the military, education, Social Security, Medicare, highways and all sorts of other things taxes pay for.

Evasion or Avoidance?

It’s completely legal to avoid overpaying your taxes, But evading taxes isn’t. The difference is pretty crucial.

U.S. tax laws offer many ways for taxpayers to lower their tax bills. For example, you can donate to a charity, contribute to a retirement plan or claim a child tax credit. But if someone claims they had five kids when all they actually had was a Doodleman Pinscher (yep, actual dog breed), that’s evasion and they will get slapped with a hefty fine if caught and potentially go to jail.

Here are some of the legitimate ways you can pay less in taxes:

  • Take advantage of the self-employment tax deduction, if you’re self-employed
  • Deduct business expenses from your income if you own a business
  • Fund a retirement plan (like a tax-deferred 401(k) or an IRA) or Health Savings Account
  • Take advantage of the child tax credit if you have qualifying children
  • Use an education tax credit if you’re paying for higher ed
  • Claim the earned income tax credit (EITC) if your income is low

Here are some illegitimate ways people evade taxes:

  • Claim deductions they don’t qualify for (like deducting the cost of air travel as a business expense when they went to Cancun for vacay)
  • Falsify documents to make it look like they have less income
  • Claim credits for something they don’t have (like a kid) or aren’t doing (like college)
  • Moving income or assets to “hidden” accounts
  • Falsely labeling transactions (like calling something “interest” instead of a dividend) to hide income
  • Paying workers in cash and not reporting them as employees

As you can see, all the illegitimate evasions involve lying or deception—an easy way to tell it’s not okay to do.

Now you may be wondering, What if I accidentally report I had less income or messed something else up? Don’t worry, you won’t go to jail. But the IRS doesn’t take kindly to people who don’t pay what they owe—even if it’s an accident—so you will have to pay some fines (but the sooner you correct your mistake the less you’ll have to pay in penalties and interest).

How to Avoid Becoming a Victim of Tax Fraud

Yes, there are a lot of ways someone can turn you into a tax fraud victim, but there are also a lot of ways you can prevent it!

If fraudsters can’t find your SSN, they can’t use it to file a fake tax return. Keep your tax records and all your important documents in a safe place. Shred any documents with sensitive info before throwing them in the trash can.

Using a tax preparation software with multi-factor authentication will help keep the info on your return safe. Ramsey SmartTax is a secure way to file your taxes from the convenience of your home.

If you’re having someone else do your tax return, make sure they’re a reputable tax preparer. Get in touch with one of our tax pros—they’re RamseyTrusted so you can be sure your taxes will be done right.

Avoid any tax preparer who wants you to sign a blank tax return or sign anything without careful review.

Be cautious about using anyone who gets paid based on the size of a tax refund they say they can get you.

If you receive any notification from the IRS that there’s a problem with your return, talk to your tax preparer right away so they can straighten it out.

In that same vein, don’t give your personal information out to anyone who calls, texts or emails claiming they’re from the IRS. Scammers often impersonate IRS agents to intimidate you into sharing sensitive data they can use to steal from you. If you get a call from someone telling you you’re in trouble with the IRS, hang up and call the IRS yourself to double-check.

 

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Early Warning Signs and Steps to Take

If you do the tax slog and get your tax return filed on time only to have your return rejected because the IRS already has one using your SSN, that’s a big red flag you may be a victim of tax identity theft. Someone may have already sent in a bogus return in your name!

That’s not the only sign you might be in trouble. Check out these other indicators you might be a victim of IRS identity theft:

  • The IRS contacts you through the mail about a tax return you didn’t file.
  • The IRS notifies you an online account was created in your name—but you didn’t make it.
  • Your IRS account is disabled or accessed even though you didn’t do anything.
  • The IRS contacts you saying you owe more taxes.
  • The IRS says you owe for a year you did not file a tax return.
  • You receive an employer identification number (EIN), but you didn’t ask for one.
  • According to the IRS, you have earned income—but it’s from an employer you never worked for.

6 Steps to Take if You’re a Victim of Tax Fraud

If any of these things have happened to you, there are a few things you can do immediately.

Report Fraud to the IRS Right Away

If you’ve received a letter from the IRS about activity you don’t think you did, get in touch right away and let them know. If the letter says you were paid by an employer you don’t recognize, contact the employer as well to let them know someone stole your identity and you are not their employee.

Keep Records

Write down the names of all the people and agencies you contacted and when you reached out. Make a copy of any communication you have with anyone involved in the fraud (like the IRS, Federal Trade Commission, employer you didn’t work for, etc.).

Submit an IRS Identity Theft Affidavit

If you’re wondering how to report tax fraud that involves your identity being stolen, this is how: Fill out IRS Form 14039, Identity Theft Affidavit, and submit it with your paper tax return. Do this immediately if your e-file return gets rejected.

Keep Paying Your Taxes

Unfortunately, just because someone else stole from you doesn’t mean you’re off the hook for your real tax bill. If you can’t submit an electronic return, file by paper. That way when the dust settles, the IRS can’t penalize you for filing late or not filing.

Create a Fraud Alert

Get in touch with one of the three credit bureaus in the U.S. (TransUnion, Experian and Equifax) and let them know your identity has been stolen. They’ll issue a fraud alert. This means creditors will take extra steps to make sure it’s really you before extending credit in your name.

File a Complaint With the Federal Trade Commission (FTC)

The FTC helps with recovery after your identity has been stolen. They will create an Identity Theft Report you can use to prove to businesses your identity was stolen. Through the FTC, you’ll also get a plan to recover your identity.

Don’t Wait Until It’s Too Late

In 2022, 5.15 million cases of identity theft were reported, and it’s just getting worse.3 Over the last decade, identity theft cases have nearly tripled.4 If those stats sound scary, that’s because they are. Fraud and identity theft are serious problems in our increasingly complicated world.

But there’s no need to freak out. On top of the steps we mentioned to help keep your identity safe, identity theft protection can add an extra layer of security and peace of mind.

We recommend RamseyTrusted provider Zander Insurance because they monitor your information in real time, alert you to risks, clean up the mess if the worst should happen, and cover up to $1 million in stolen funds.

Don’t wait until some thief pilfers your tax return to take action. Get in touch with Zander and put some serious security between you and the bad guys!

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About the author

Ramsey

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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