Every year the IRS releases a list of the biggest current tax scams. Sometimes taxpayers participate in the scams knowingly and sometimes they are simply innocent victims. There is always a significant rise in tax schemes as the filing season begins and the IRS urges people to vigilant about protecting themselves from unknowing involvement, and cautions those who may try to fraudulently avoid paying taxes. For those filing US taxes abroad, it is especially important to pay close attention to potential scam artists.
Because filing US taxes from another country can sometimes be an exhausting and confusing process, expats may be more likely to become embroiled in a tax scam without ever knowing it. Keep a watchful eye out for these top tax scams.
1. Identity Theft
It’s no surprise in this day and age that identify theft tops the IRS scam list yet again. Identity theft is when someone uses your personal information (i.e. your name, Social Security number or other identifying information) without your knowledge. There has been a growing problem with scammers stealing this information, filing a fake return under the stolen identity and claiming a large refund.
This issue is a huge one for the IRS and they are aggressively working to uncover and prevent identity theft. If you have any reason to believe your identity may be compromised, contact the IRS Identity Protection Specialized Unit at 800-908-4490 to alert them to a potential problem.
2. Telephone Scams
While expats may be less likely to encounter this with their international telephone numbers, phone scams are a notorious issue around tax time. Scammers pretending to be IRS representatives contact their victims, elicit personal information and steal their identity or money. These scams come in a variety of forms, but a popular one is when callers claim the victims owe money or are owed a huge tax refund—some callers even threaten arrest.
If someone can only recite the last four digits of your Social Security number, you receive questionable emails from the IRS, or you hear background noise such as other calls being made during a conversation with a supposed IRS-representative, you may be talking to a scammer. Hang up and call the IRS yourself and speak to a qualified agent to discuss your situation.
Similar to identity theft, phishing is where criminals attempt to steal your financial information through emails or a fake website. Simply put, the IRS doesn’t contact people via email for personal or financial information. Do not respond to these kinds of emails.
4. Inflated Refund Claims
Scam artists sometimes come in disguise as tax preparers—who promise they can get you huge refunds, but it’s usually done so by making false claims for benefits or tax credits you don’t qualify for. Remember that you are ultimately responsible for your tax return, even if someone prepares it on your behalf. Ensure you’re using a qualified tax professional who will get you all the credits and deductions you qualify for—legally.
5. Return Preparer Fraud
Similar to the inflated refunds scam, fraudulent behavior by tax preparers is always an issue. If your tax preparer encourages you to claim exemptions and credits you do not believe you qualify for, it is your responsibility to speak up. Again, you are held responsible for your tax return, regardless of who prepares it. When filing US taxes abroad, make sure you enlist the help of a tax preparer who is a CPA or IRS Enrolled Agent—the preparer must also sign the return and enter their IRS Preparer Tax Identification Number.
6. Hiding Income Offshore
Ah, the good ol’ tax evasion scheme. As many expats know, the IRS has tax evaders in their crosshairs at the moment. Programs such as FATCA, the Foreign Account Tax Compliance Act, were created to catch those stashing funds in offshore accounts in order to avoid paying US taxes. While expats are not the ultimate target of this program (as you are legitimately keeping funds in an overseas bank due to the fact that you reside there), you are still required to report your foreign account balances if they are $10,000 or higher at any point during the tax year. This is reported on your FBAR form, which is filed electronically to the US Treasury Department by June 30 each year. If you are behind in FBAR filings or filing US taxes abroad, the Offshore Voluntary Disclosure Program or the Streamlined Program are available for you to get caught up.
7. Charitable Organization Scams
While there are so many legitimate charities that exist to help people, scammers often pose as charities in order to solicit money. This may be attractive since you can you deduct the donation from your taxes, but it’s important to check the authenticity of any charity you are considering donating to.
8. Fake Income, Expenses or Deduction Claims
Do not fall prey to the suggestions of a tax preparer who wants you to fudge your income amounts in order to qualify for refundable credits, such as the Earned Income Tax Credit. Making false claims such as these can result in fines, interest and penalties—including possible criminal prosecution.
9. Frivolous Arguments
You may occasionally hear about websites that claim to have ‘insider information’ about how to avoid paying taxes, or see a book that promotes the author knowing something you don’t know about how the tax system works. These are bogus arguments, and the ones promoting this information can be prosecuted right alongside you if they assist you in claiming benefits or credits you aren’t entitled to.
10. False 1099
Filing fake forms such as a 1099 is illegal. It may be tempting, as it could significantly lower or eliminate your tax bill. But once again, this can result in huge penalties and possible criminal prosecution.
11. Complex tax structures
The IRS is cracking down on those creating convoluted tax structures in order to shelter money from tax liability. Whether it’s creating a multitude of entities or stashing money in offshore companies, it is tax fraud if the ultimate goal is to hide money. Taxpayers themselves can be prosecuted for this, as well as anyone who provides assistance in the scam.
12. Abusing Trusts
It has become increasingly popular to use trusts, both foreign and domestic, to avoid taxes. Expats creating foreign trusts are usually doing so for legitimate reasons but be careful when setting these up—they are being scrutinized heavily by the IRS. The IRS has stated that it is acutely aware of taxpayers using foreign trusts and private annuity trusts to shift income and deduct personal expenses (and sometimes to avoid estate transfer taxes). Contact a qualified expat tax professional before creating foreign trusts to ensure it is properly executed. To learn more about how to properly report the activity of your foreign trust, check out this article.
Have more questions about filing US taxes abroad?
We understand that filing US taxes abroad can be a daunting task. Whether you are looking for country-specific information or more general personal US tax information, our blog has what you need. If you would like us to help you file your US expat taxes, get started right here!