MONEY's Jake Davidson takes the plunge and attempts to prepare his own taxes for the first time. How hard could it be?
A nasty con is on the rise involving fake IRS agents who call up potential victims and demand payment for back taxes.
Scammers who pretend to be IRS agents and harass unsuspecting citizens into paying debts they don’t owe have been quite busy over the last two years. According to the Associated Press, some version of this scam has resulted in victims being conned out of $15.5 million since 2013.
Only a small percentage of people who are targeted actually fall for the ruse, which in the past has involved criminals claiming to be federal agents named, rather uncreatively, Steve Martin or Jack Dawson—the actor-comedian and Leonardo DiCaprio character in Titanic, respectively. Roughly 3,000 have given money over to the con artists, out of more than 366,000 that have been contacted via phone over the past two years. But some of those who are victimized have been bilked out of big money—to the tune of more than $500,000 in one instance.
In order to avoid being victimized yourself, bear in mind a few key points:
Don’t trust caller ID. As the FTC noted last summer, scammers have ways of “spoofing” caller ID to make it look as if the call is originating from a government agency.
The IRS doesn’t call people up out of the blue. The IRS almost always contacts people about unpaid taxes first by mail, not by phone. So if someone claims to be a government agent and says that you owe money, or perhaps that you’re eligible for a refund or some prize, look up the agency’s official number and dial it up to check if what you’re hearing is legitimate. Most likely, it isn’t.
Don’t give out or confirm info over the phone. Fake agents may have some of your personal info—even the last four digits of your social security number. Don’t help out the imposter by confirming this info or giving out any other information over the phone.
IRS agents won’t ask for a specific form of payment. Scammers usually want payments made via prepaid debit cards or wire transfers because they’re difficult to trace. A genuine IRS agent never asks for immediate payment over the phone, never requests payment information over the phone, and never specifies a certain form of payment for unpaid taxes.
The IRS won’t threaten you with arrest or deportation. Or losing your driver’s license, your job, or your business. Scammers have made all of these threats and more in order to get victims to pay up swiftly. But again, if you truly owe the IRS money, you will first be notified by mail, not with a phone call. And certainly not with a harassing phone call.
As Timothy Camus, a Treasury deputy inspector general for tax administration, explained to the AP, “If someone calls unexpectedly claiming to be from the IRS with aggressive threats if you do not pay immediately, it is a scam artist calling.”
If you do get a call that you suspect to be a scam, hang up the phone right away, and then report the incident at the taxpayer administration hotline (800-366-4484). File a complaint with the FTC as well.
A break from how you normally file your taxes can lead to costly mistakes—and attract the attention of the IRS.
Taxes are one of the few constants in life, but what happens when you change the way you do your return?
People move or get divorced, tax preparers pass away. There is always the lure of do-it-yourself—the number of people using tax software to file, like Intuit’s TurboTax, increases by 6% annually, according to the Internal Revenue Service. And then there is the reverse exodus of people who have decided their financial lives are too complicated, and they need to hire a professional.
With so many changes, consistency takes a beating. If you are on the wrong end of it, you could end up drawing the dreaded attention of the IRS.
Here are the items that can trip up taxpayers when they switch the way they do their taxes:
1. Mileage logs
When John Dundon took over his father’s tax business after he passed away last July, the biggest surprise for the Denver, Colorado-based tax preparer was that road-warrior clients were not keeping mileage logs.
“Boundaries erode all the time between practitioner and taxpayer,” Dundon says. Laziness seeps in disguised as trust, and years later, there are simply no logs.
Dundon tells his father’s crossover clients they need a renewed zeal for paperwork—get a GPS device or a smart phone app for next year. For 2014 taxes, he is asking clients meticulously through calendars and maps to sort it out.
2. Rental property depreciation
Depreciation is a deduction you can take on certain assets, like rental property. The tax impact can be pretty significant, especially if you are trying to off-set income like rent.
The dollar amount is determined by a formula you follow year-after-year, called a depreciation schedule, which could run almost the full course of a 30-year mortgage.
“You definitely need that schedule. You can try to guess at it, and you’d probably be okay, but you wouldn’t be doing it 100% right,” says tax preparer Anil Melwani, who runs his own firm, 212 Tax & Accounting Services, in New York.
If it was not done at all previously or done wrong? You’ll need to file an amended return to correct it, Melwani says.
3. Carryforward losses
The IRS allows taxpayers to take $3,000 in losses a year on investments, and to carry forward those losses indefinitely until the amount is all used up. But use it or lose it—meaning, if you miss a year because you forget, you can’t pick it up in the following years as if nothing happened.
Harvey Bezozi, who has his own firm in Boca Raton, Florida, has a new client this year who will likely have to file amended returns because she skipped over this with her last preparer.
4. Home office
Taking the home office deduction? Stay consistent with the square footage of your home office. The best way to do that is to get out your tape measure and only include space that you use exclusively for work.
If there’s a pingpong table in the middle of the basement study you’re trying to claim, that’s a no-go, says Dundon.
5. Life changes
There is a lot that a new tax preparer—or a tax software autobot—can learn about you by just looking at your past returns, but their questionnaires will not catch everything. If you have a baby, buy a house, get divorced, have income in a foreign country or have job-hunting related expenses, you’ve got to speak up.
But things can get missed when people do not know enough to know what they are missing. That’s what drove a DIY-type like Ben Jaffe into the hands of a paid tax preparer this year.
Jaffe, a 29-year-old who works in PR in New York, bought a house in 2014 while his wife had a baby. He made the switch away from tax software because, he says, “I wanted an expert opinion to verify that I was doing everything right.”
One hour and $500 later, he’s feeling confident: “It saved me a lot of time and stress.”
To protect your identity—and get the refund you're due as quickly as possible—follow this guide.
Did a thief beat you to filing your own taxes this year?
You’re not alone. More and more Americans are finding that someone has taken over their identity to file a fraudulent tax return in their name and collect the refund check.
In the first half of 2013, 1.6 million taxpayers were hit by tax identity theft, compared to just 271,000 in all of 2010, the Treasury Inspector General for Tax Administration reported. And the IRS paid out $5.8 billion in stolen tax refunds in 2013, according to a study by the General Accountability Office (GAO).
The increased use of electronic filing means that fraudsters are able to file a greater number of returns more quickly and with little or no documentation. This year, the number of suspicious electronic returns has been so great in some states that in February TurboTax, one of the largest tax prep software providers, temporarily suspended processing all state tax returns until it could block users from filing unlinked state returns, which are returns filed without a federal return.
Unfortunately, the number of false returns may not be coming down any time soon. A GAO report just named the IRS’s ability to address tax refund fraud and identity theft as one of the government’s top weaknesses.
If you’ve received a notice from the IRS stating that more than one return has been filed in your name, or if you believe your identity has been used fraudulently, here’s what to do:
1. Report the Fraud Quickly
Call the IRS Identity Protection Specialized Unit at 800-908-4490 right away so that they can begin the process of verifying your information. You’ll also need to fill out an identity theft affidavit, or Form 14039, so that the IRS can place an alert on your account. If your state tax return was filed falsely as well, contact your state revenue agency (for your state’s hotline, check out this list).
Also report the theft to the police. While law enforcement is unlikely to investigate, many government agencies and credit bureaus require an official theft report to help you solve the fall-out.
2. Gather Your Proof
“When you call the IRS about the ID theft, have old copies of your tax returns from the past two or three years out. It will move your case faster,” says Valrie Chambers, a CPA and Stetson University accounting professor.
By providing additional information that the IRS can check against, you strengthen your case that your return is the legitimate one. For example, an ID thief is unlikely to know that you got divorced two years ago and stopped filing jointly, but this fact can easily be checked by the IRS, giving your filed return more credibility.
While you’re searching for those forms, also pull out your driver’s license, birth certificate, passport, two recent utility bills, and, if you’re married, your marriage certificate. You’ll need to mail in copies of all these documents as well as your police report in order for the IRS to verify your tax return and rule the other one fraudulent, says CPA Art Auerbach, who has worked with tax refund theft victims.
3. Pick Up More Protection
Once you report the fraud and fill out the affidavit, the IRS should issue you a personal identification number to provide another layer of security. You’ll need to submit this PIN along with your Social Security number when you file any tax form going forward so that the IRS knows to carefully check over your account. As an identity theft victim, you’ll get a new PIN every year.
If you live in the tax fraud hotbeds of Florida, Georgia, and D.C., you can apply for a PIN without having been an ID theft victim, thanks to a new IRS initiative. To get the six-digit number, you need to register and verify your identity online. You can sign up on the IRS website.
4. Alert the Credit Bureaus
“If a thief had enough information about you to file a false tax return, he could have also opened new credit card accounts or taken out a loan in your name,” says CPA Troy Lewis, chairman of the American Institute of CPAs’ tax executive committee.
Set up free fraud alerts with the three major credit reporting bureaus, Equifax, Experian, and TransUnion. These alerts, which last 90 days but can be renewed, warn potential creditors or lenders that you are an identity theft victim and that they must verify your identity before issuing credit.
You can go a step further by placing a credit freeze on your files, which instructs the credit agencies to prevent new creditors from viewing your credit score and report. With a police report, it’s free; without one, it can cost as much $10, depending on your state.
A freeze will keep you from accessing instant credit too. If you need to apply for a loan, you will need to give the agency permission to thaw your data, and in some cases you’ll pay a fee to lift the freeze, which can take a few days.
5. Check Your Credit Report
You are entitled to a free copy of your credit report from each of the three agencies. Check them carefully for unauthorized activity. Look at your history as well as recent activity. Just because you were first alerted to the problem through a false tax return does not mean that’s where the ID theft started.
If you see errors in your report, such as wrong personal information, accounts you didn’t open or debts you didn’t incur, dispute those errors with each credit agency and the fraud department of the businesses reporting that inaccurate information.
6. Change Your Passwords
In the past, most thieves collected data about a taxpayer and then created an account at a tax preparation software site to file a false return. But Intuit, the parent company of TurboTax, says that in the past 18 months it’s seen fraudsters shift to taking over people’s existing accounts.
Thieves know that people use the same password at multiple websites. When usernames and passwords are compromised in a data breach, a thief could use them to test for a TurboTax account and file in your name.
If you have an online account at a site like TurboTax, make this password unique from any other passwords you use online. Follow this guide to make it as secure as possible. If you use your tax prep password at your bank or any other site with personal information, change that password too.
7. Be Patient
The IRS says a typical case of ID theft can take 180 days to resolve. And even after you’ve cleared up this year’s tax mess, tax and credit fraud can be a recurring problem.
When a thief beats you to filing, the IRS will flag your legit return and process it manually, scrutinizing every detail to figure out which return is authentic. This means your refund could be delayed for months.
The IRS will always pay you your refund, regardless of whether it already paid it out to a fraudster. If your tax fraud case hasn’t been resolved and you’re experiencing financial difficulties because of the holdup with your refund, contact the taxpayer advocate service at 877-777-4778.
That call you got probably isn't actually from the IRS
The FTC released its annual list of the top consumer complaints, and while there are some perennial gripes therein, there are also some new things consumers should watch out for.
Among the more than 2.5 million complaints, not including do-not-call complaints, identity theft once again takes the top spot—a position it’s held for 15 years running now. In 2014, 13% of the complaints the fielded by the FTC, state and federal agencies, consumer protection and other non-governmental groups pertained to identity theft.
Right behind it, debt collection complaints held onto the number two spot with 11% of the complaints, but a new entrant entered the third spot: so-called “impostor” scams.
Impostor scams are when someone calls and pretends to be from a government agency or other authority, usually the IRS, but not always. These scams often revolve around tax-related topics. The FTC says complaints about fake “IRS” agents was almost 24 times higher last year than in 2013.
“IRS employees won’t call out of the blue and threaten to have you arrested or demand specific methods of payment,” says Jessica Rich, director of the FTC’s Bureau of Consumer Protection. If the real IRS needs to get ahold of you about a tax bill, they know where you live — they’ll do it by mail.
Military personnel appear to be at a higher risk for impostor scams. While it was the third most common complaint overall last year, it was the second-highest complaint for military consumers.
“Whether it’s pretending to be the IRS during tax season, or making false promises of a lottery win, scammers are increasingly sophisticated in their efforts to deceive consumers,” Rich says.
Members of the military also seem to be targeted to a greater degree by shady educational outfits: Although complaints related to education were pretty far down the list among the general population, they ranked seventh-highest among members of the military.
Where you live also makes a difference in the likelihood that you’ll be targeted by scammers. The FTC says the most identity theft complaints come from Florida, Washington and Oregon, while the most fraud complaints come from Florida (again), Georgia and Nevada.
Nationwide, more than half of fraud complaints originate with a scammer calling the victim; about a quarter of the contacts are initiated by email. Fraud pertaining to government documents or benefits was the most common kind, making up almost 40% of complaints. Prepaid cards and wire transfers were the most common ways scammers separated victims from their money.
Budget cuts have made getting through to the agency by phone tougher than ever. Here's where else to turn.
Excruciatingly long holds on the Internal Revenue Service’s help line this year mean that taxpayers need to find better ways to get their questions answered.
The problems start with the fact that the IRS has cut nearly 12,000 positions as its budget has fallen by an inflation-adjusted 17% since 2010.
New health insurance requirements are also creating more paperwork. People with health coverage through their employers or other groups will just have to check a box, but those with coverage through Affordable Care Act insurance exchanges, or who are applying for an exemption, will have to submit more forms.
In addition, the IRS changed the rules on how repairs to tangible property are treated, requiring accounting changes for businesses, including landlords, that own real estate and equipment.
As there will likely be a last-minute crush of work for professionals as affected taxpayers belatedly learn about the changes, it’s best to start as early as possible, says Melanie Lauridsen, tax technical manager for the American Institute of Certified Public Accountants.
The National Taxpayer Advocate earlier this year predicted that about half of all hotline calls wouldn’t be answered and average wait times would stretch beyond 30 minutes.
Compare that to fiscal year 2004, when the IRS answered 87% of calls with average wait times of less than three minutes.
Tax professionals, who have their own dedicated hotline with the IRS, aren’t being spared either. One CPA recently spent two hours and nine minutes on hold before his call to the tax practioner’s hotline was answered, and his experience isn’t unusual, said AICPA’s Lauridsen.
“It’s going to be a horrible filing season for everyone,” she said. “As we’re getting deeper into the filing season, the wait times are getting worse.”
And taxpayers who get through to the IRS have no guarantees their question will be answered, Lauridsen added. This year helpline staff are limiting their answers to “basic” tax law inquiries, and won’t answer any tax law questions at all after the filing season ends.
Some free alternatives to the helpline exist, including:
1. The IRS website. Not only does the IRS site have every form and publication you’re likely to need, but the site also handles some of the most common tasks, including paying your tax bill, setting up a payment plan, getting a transcript of your return, and checking on the status of your refund (which you also can do with the agency’s mobile app, IRS2Go). The site features an interactive tax assistant, which uses an interview format to answer some of the most common preparation and filing questions.
2. Walk-in centers. You can make an appointment to get free face-to-face help at one of the Taxpayer Assistance Centers. As with the IRS helpline, only basic tax law questions will be answered and only until April 15. The centers no longer will help you prepare a tax return.
3. Tax software. The IRS’ Free File program allows people with incomes under $60,000 to use popular tax preparation software such as H&R Block, TaxAct and TurboTax for free.
The programs offer an interview format and built-in error checkers that catch math and other common mistakes.
4. Volunteer sites. The AARP Foundation’s 35,000 Tax-Aide volunteers helped 2.6 million people file their returns last year, said Dorothy Howe, the program’s assistant national director. The program is designed to help low- to moderate-income people, but there’s no age limit, Howe said.
“Even though this is being offered by AARP, you don’t have to be over 50 and you don’t have to be retired,” Howe said.
What you do have to have is a relative straightforward return, Howe said. A 1040 with some itemized deductions is fine. If you’re a day trader with a ton of investments or a small business owner, you should hire a tax pro.
From planning to scanning, there’s an app for every accounting need
Let me start by saying that I am not a tax professional. But I am a professional who pays his taxes, and I highly recommend getting expert assistance in navigating the bureaucratic machinations that are the state and federal income tax systems.
Still, if you are planning on going it alone (or you want to get organized enough that your accountant doesn’t charge you a bundle), there are many ways technology can help you file your taxes. Let’s take a look:
The best way to take the sting out of tax time is to make a plan and stick to it year-round. Online budgeting programs like Mint can continuously monitor your spending to keep you on the straight and narrow, while making it easier to pull out certain details once tax season comes around. But Learnvest, a financial planning program with a great educational element, can help you better understand your money, not just categorize it.
Where neither of these fit the bill, turn to Ask A CPA, a free app available on iOS and Android that shares answers to many questions asked by taxpayers, some common — “Are funeral costs deductible?” — and others not —“Can I deduct my ‘girlfriend’ who lives with me as a dependent?” — really.
Whether it’s keeping track of a year’s worth of healthcare payments or accounting for various business-related expenses, the long slog of shepherding your receipts can be a tough one to keep up. TurboTax ItsDeductible, which is available online or as an iPhone app, excels at keeping track of your charitable donations, whether they were goods or funds. Shoeboxed, as its cutesy name implies, helps get through the clutter of your favorite paper receptacle by not only providing a scan-by-mail service for your paper trail but also by collecting electronic receipts from your Gmail account. With an organization system approved by the IRS, it’s a great way to go paperless with confidence.
For people who would rather scan their own files, Neat offers a great combination of scanners, mobile apps, and software to keep your data categorized and easy to search. It also offers cloud backups, which is great in case something happens to your home or office computer. However you do it, make sure you keep track of IRS guidelines for keeping electronic records.
Gone are the days of filling in forms with pencils (and littering your table with eraser bits). Now, programs like Intuit’s TurboTax (available in every permutation imaginable, from CDs to online interfaces to mobile apps) are the way most people make good with Uncle Sam. For people with relatively straightforward taxes, the app makes filing almost fun, with easy-to-follow questions and imagery to help guide your answers. Of course, these conveniences come at a cost, as the mobile software has a mind-boggling variety of in-app purchases available.
H&R Block 1040EZ 2014 keeps it simple and low-cost for iPhone users as well, with free-to-file federal returns and just $9.99 for state return preparation. But perhaps more valuable is the company’s free, in-person audit support for people who use their services.
Once you’ve submitted your income tax return information, be sure to download IRS2GoApp, which is available for both Android and iOS. The official smartphone app of the IRS, it can provide status updates on your refund as well as provide tax tips so you’re streamlined and ready to go next year.
We're getting responsible about that "free money" from Uncle Sam
About 80% of Americans who filed taxes got back a refund last year, averaging just under $2,800. Usually, even though it’s our money to begin with, we treat it kind of like a windfall, buying appliances, going on vacation or spending it in other fun ways.
That’s not happening this year.
According to an annual National Retail Federation survey, nearly half of Americans who plan to get a refund say they’re going to be socking part of all of it away into savings — the highest percentage ever recorded. About 40% say they’re going to pay down debt with part of all of their refund, a three-year high. Perhaps surprisingly, it’s young adults leading the charge, with 55% of those under 24 years old planning to save their refund money, the highest percentage of any age bracket.
About 13% of respondents do say they’ll use the money on a vacation, which is a high not seen since 2007’s tax season, before the recession hit. Only about 10% say they’re making a big purchase like a TV or a fridge, a slightly smaller number than last year and the lowest percentage in the survey’s history. About the same number say they’ll splurge on things like dinners out, spa treatments and new clothes.
“Americans are thinking of the future, and remaining financially secure is a big part of that,” NRF president and CEO Matthew Shay said in a release. Getting our hands on those refund checks is another part — when the survey was conducted in early February, almost a quarter of people said they’d already filed their taxes (although 15% are procrastinators who admit they’ll wait until April).
The good news, relatively speaking, is that fewer Americans are relying on their tax refunds to pay for everyday expenses. It’s still about a quarter of survey respondents, but that’s better than the 30% who said they needed that money for everyday expenses just two years ago.
Even with this year’s intention to be diligent about our tax refunds, though, Americans aren’t nearly out of the woods when it comes to the security of their savings accounts. A Bankrate.com survey published this week finds that nearly one in four Americans have more credit card debt than they do money in savings, while another 13% have no credit card debt, but no savings, either. Fewer than 60% have more savings than credit card debt, a situation Bankrate chief financial analyst Greg McBride describes in a release as “teetering on the edge of financial disaster.”
Identity theft poses a huge risk to your children's financial future, but it could make a mess of your taxes, too.
Filing your taxes should trigger a feeling of relief — it’s a huge thing you get to scratch off your to-do list — but millions of taxpayers have submitted their taxes only to have a very unpleasant experience: that their Social Security number has already been used in a tax filing. Most people discover this when attempting to file their taxes online, and they’ll instantly receive a notification from the IRS that the return has been rejected as a fraud attempt.
Instead of marking the end of your tax adventures for the year, such a notification is only the beginning of the many months it will take to correct your taxes. Risk isn’t limited to your Social Security number — if you have dependents and someone fraudulently files taxes with their Social Security numbers before you do, it will affect your return.
It happens. Identity theft among children is sometimes harder to detect, because one of the best ways to discover fraud is by checking credit reports. Your child shouldn’t have a credit report until he or she has a loan or credit card in his or her name, so parents assume there’s nothing to use as a fraud detector in the first place.
If Someone Claims Your Child as a Dependent
When you try to file your taxes, rightfully claiming your child as a dependent, you’ll likely receive a message from the IRS saying someone has already claimed the person with that Social Security number as a dependent and your return has been modified to exclude that person. That will affect the refund you receive (or how much you owe the IRS), even though you can rightfully claim the child as your dependent.
At this point, you need to do two very important things: Start the process of fixing the problem, and protect your child’s identity from further abuse.
How to Fix Your Taxes After Fraud
Jared Callister, a partner and tax attorney at Fishman Larsen Chaltraw & Zeitler in California, said the first thing you should do is contact the IRS to dispute the rejection of your dependent claim. The message from the IRS informing you of the issue should include contact information.
“Write a quick letter to that response, saying it’s your child and you want the IRS to adjust it back to what the original return said,” Callister said.
Then you need to notify the IRS of the identity theft by filling out Form 14039, Identity Theft Affidavit on behalf of your child.
“And then you’re just kind of waiting for a response from the IRS,” Callister said. “My guess is it will take about 6 months to get that resolved.”
To follow up on identity theft issues regarding taxes, you can contact the Identity Protection Specialized Unit at 1-800-908-4490 — expect to be on hold for a long time, especially if you’re calling during filing season.
How to Protect Your Kids From Further Fraud
Once someone’s Social Security number has been stolen, it can be extremely difficult to prevent abuse. Contact the credit bureaus and notify them your child’s Social Security number has been stolen, and regularly request the child’s credit reports to make sure no one is opening unauthorized accounts in his or her name.
Undetected fraud can wreck a child’s credit before he or she has had a chance to establish it, which is why it’s important to intervene early. Most parents want their children to enter adulthood with a good financial foundation, and credit is a huge part of that, so take action quickly if you sense your child’s identity has been abused.
More from Credit.com
- How to Use Credit Monitoring to Protect Your Kid’s Identity
- A Guide to Keeping Tax ID Thieves at Bay
- How to Get Your Free Annual Credit Reports
This article originally appeared on Credit.com.