Tax Scams, Hiring a Tax Preparer, and Caution on Refund Anticipation Loans

January 26, 2011

BBB Seasonal Warning: Tax Scams, Hiring a Tax Preparer, and Caution on Refund Anticipation Loans

Consider Using a BBB Accredited Business for your Tax Needs in 2011

Tax Scams

With tax season upon us, consumers need to be aware of costly tax scams that hurt tax payers. With new twists and incentives to file online in 2011 rather than by way of mail this shift could open doors to new online twists to already tried-and-true tax scams.

Common tax scams involve withholding income, making bogus arguments about illegal taxes, creating fake deductions or filing false claims for tax credits, tax returns overstating Social Security income, and claims on taxes withholding money. These scams come in various forms: fake web sites, random calls, questionable “tweets” in Twitter, and via ads on Facebook.

The most common tax scam (and the most reported) is via “phishing” emails, supposedly from the IRS which are meant to get you to compromise your financial profile and info to fake pages online by clicking on a hyperlink contained in a SPAM email.

Tax Preparers: What to Watch for

Unlike other scams where scammers know about the phony deal but the victim often doesn't, tax scams can involve a second party: the taxpayer. In addition to the questionable tax preparer getting fined, the IRS won't let taxpayers off the hook so easily, either: the IRS will add interest and penalties. Make sure you are doing research before going with a tax preparation group. Also, make sure they are properly licensed in the state in which they are primarily located, as well as your state, too. If you have issues concerning a tax preparer, be pro-active and file a formal complaint for resolve with BBB at:

Here are some red flags to look for when choosing a tax preparer:

* Claiming that they can obtain larger refunds than other preparers.

* Basing their fee on a percentage of the amount of the refund. Fees should be based on the complexity of the return, never on the size of the tax savings or refund.

* Claiming they can get you immediate payment of your return. Keep in mind that this is a loan (refund anticipation loan).

* Refusing to sign the tax return or provide a copy for your records. Always make sure you have something in hand that shows proof of what transpired and you should have a receipt for services rendered.

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Exercise Caution with "Refund Anticipation Loans"

For taxpayers who want to get their hands on their tax refund money right away, keep in mind that an instant refund can come back to cost more than it helps. RALs are based on anticipated (not actual) tax refunds. If consumers end up getting less money back than predicted, they still owe the money loaned and will incur hefty fees and fines if they don't pay off the RAL on time. Instant refunds have come under scrutiny lately causing RALs to be harder to get and at a higher price. Know what you are getting into before signing up, and ask yourself these questions:

* Why not e-file and direct deposit? The fastest and most secure way for consumers to get their refund is to file their taxes online and then allow a direct deposit of the refund into their bank account. Taxpayers can have the money in as little as eight to 15 days.

*Finance purchases other ways. If consumers are looking to purchase specific high-priced items with their refunds, the BBB encourages them to look into financing options, such as through store credit promotions and offers.

*If you must go with an RAL, then shop around, and make certain that you are dealing with a legitimate company.