Research and Statistics

Fighting back against the growing threat of tax fraud


Tax fraud scams have skyrocketed as rip-off artists file phony tax returns on consumers’ behalf. To avoid getting burned, be alert to their tricks

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Worried about paying a hefty federal income tax bill this year? Your bigger fear should be whether your identity or cash might be stolen by scammers claiming to be from the IRS.

Two types of scams are common these days. One involves fraudsters who get their hands on your personal information and use your Social Security number to file a fraudulent tax return, with the goal of collecting a refund.

The other rip-off comes from scammers who purport to be from the IRS and demand you pay your tax bill immediately by wire transfer or prepaid card. They then threaten you with arrest or other legal action if you do not obey orders.

Surge in complaints
The number of IRS tax fraudster complaints filed has skyrocketed from just 2,545 in 2013 to a staggering 54,700 in 2014, according to the Federal Trade Commission. Tax-related identity-theft complaints reached nearly 110,000, accounting for one-third of all identity-theft complaints.

It is impossible to say exactly why tax-related crime is climbing, but Eva Casey-Velasquez, CEO of the Identity Theft Resource Center, says “These guys go for the low-hanging fruit.”

If the bad guys already have your personal information, it doesn’t take a lot of sophistication to fill out fake tax returns, she says.

How tax fraud scams pay off
The fraudsters may file hundreds of fake tax returns, with the hope that some will make it past IRS monitoring, says Mark Steber, chief tax officer at Jackson Hewitt Tax Service.

If the crooks file 100 returns seeking refunds of $3,000 or $4,000, and even a handful make it through, they quickly add up to tens of thousands of dollars that the scammers can pocket, Steber says.

The IRS dished out at least $5.2 billion in fraudulent tax refunds during the 2013 tax filing season, according to the U.S. Government Accountability Office (GAO). The IRS also prevented $24.2 billion in fraud. But that may be the tip of the iceberg.

“The full extent is unknown because of the challenges inherent in detecting IDT (identity theft) refund fraud,” the GAO wrote.

How the tax fraud scams work
Scammers may also call you up, claim to be from the IRS, and demand immediate payment of taxes. If you do not cough up the cash, they may threaten you with jail time.

These scammers alter caller ID numbers so it appears that the IRS is calling you, and use fake names and IRS badge numbers to try to add legitimacy to their claims. They may even have the last four digits of your Social Security number.

The IRS considers it the top tax scam for 2015. “It has been a persistent and pervasive problem for many taxpayers for many months,” the IRS said in a news release.

These guys go for the low-hanging fruit.

— Eva Casey-Velasquez
Identity Theft Resource Center

The Treasury Inspector General for Tax Administration has received reports of about 290,000 such calls since October 2013, and is aware of nearly 3,000 victims who have paid out more than $14 million in total to fraudsters.

The elderly, immigrants and nonnative English speakers are frequent targets of such scams.

“These criminals try to scare and shock you into providing personal financial information on the spot while you are off guard,” IRS Commissioner John Koskinen said in the release.

Homing in on tax fraud
The Tampa Bay area and South Florida were ground zero for the boom in fraudulent tax return filings starting in late 2010.

Chantel Negron, loss prevention manager at Grow Financial Federal Credit Union in Tampa, recently attended an IRS conference on the problem.

“Three years ago, we were inundated with these tax refunds,” as scammers tried to cash their ill-gotten refund checks, she says.

Local banks and credit unions in the Tampa area have homed in on warning signs of possible fraud, such as having several tax refund checks deposited into one bank account, Negron says.

In the past, it has been difficult to get fraudulent-gotten gains back to the IRS. If a refund triggered suspicion at a financial institution, it would require a lot of time and multiple communications before the IRS would confirm that the refund was fraudulent, she says.

This year, a new system is in place to make it easier and quicker for financial institutions to flag suspicious refunds to the IRS.

In fiscal year 2014, the IRS launched more than 1,000 identity-theft-related investigations. Nearly 750 people were sentenced in identity theft cases in 2014, compared to about 440 the previous year. The average sentence was 43 months, and the longest sentence was 27 years, the IRS reported.

But even as the IRS attempts to crack down, scammers are finding new ways to disguise their crimes.

It has become more common for fraudsters to seek refunds on prepaid debit cards, Negron says. That way, the crooks do not have to go to the bank to cash a check or provide personal information.

“It’s much more under the radar,” Negron says.

Fighting back against tax fraud scams
Despite some success in combating scammers, the problems with tax refund fraud and scams are not going away any time soon.

The IRS budget for 2015 is $10.9 billion. That’s $1.2 billion less than it was in 2010.

  • You get a call and are told “You owe the IRS.”
  • The caller may give a badge number.
  • Caller ID may show the number as coming from the IRS.
  • The caller may already know your Social Security number, or its last 4 digits.
  • The IRS doesn’t make initial contact by phone or email, only by U.S. mail. The IRS won’t ask you to pay with a prepaid debit card or a money transfer.
  • Don’t give out financial or personal information, and write down details of the call, such as the number and name of the caller.
  • Report the call by filing a complaint with the Treasury Inspector General online or by calling 800-366-4484, and to the FTC online or by calling 877-FTC-HELP.
  • Contact the IRS Identity Protection Unit online or by calling 800-908-4490.
  • File an Identity Theft Affidavit (Form 14039).
  • Report the fraud to police.
Sources: IRS, FTC

“This means new taxpayer protections against identity theft will be delayed,” Koskinen wrote in a letter to IRS employees.

You can help protect yourself by filing your tax return early, Steber says. When the IRS receives a tax return bearing your Social Security number, it won’t accept other returns with the same Social Security number.

Even if you owe money, you should file your return as soon as possible, and then write a check to the IRS by April 15, Steber says.

In Florida, Georgia and Washington, D.C., the IRS is offering a one-time-use identity protection personal identification number (PIN). You can use the PIN when you file your tax return. The PINs already are being issued to about 1.5 million U.S. taxpayers who have been identity-theft victims.

Steber also recommends filing your return electronically so paper copies are not lying around, and to protect your Social Security number “the same way as you would treat any physical asset,” such as jewelry or other valuables.

If you get a call from someone claiming to be from the IRS, Velasquez says you should tell the caller you will call back. Then, look up the actual number for the IRS either online or in the telephone directory. Never call a phone number that a suspected scammer gives you.

If you say you want to call back and the caller hangs up, “You know you’ve dodged a bullet,” Valasquez says.

See related:What records to keep, how long to keep them, Forgiven debt is often taxable

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