Tax season often provides the perfect cover for fraudsters. From filing to refunds, Americans are hardwired to expect communication from the Internal Revenue Service, and for some, it can be difficult to decipher legitimate notifications from rogue communications designed to steal your personal information and money.

American taxpayers saw a 60 percent spike in email phishing scams last year, according to the FBI’s Internet Crime Complaint Center. And that criminal activity peaks in the months leading up to tax season as fraudsters impersonate government agencies in tax-themed emails, the IRS warns.

But emails are only one method used by scam artists. The IRS issues an annual "dirty dozen" list that outlines the year's most common trends in tax fraud, with the 2021 list including phishing, identity theft, fake charities, and more.

No matter the type of scam, the best defense is to educate yourself, explains Sarah Schneeberger, head of Risk Advice & Support at RBC Wealth Management-U.S.

“Be aware of what the fraudsters are doing so you can be on guard," she adds.

The most common types of scams

Most scams fall under two categories: “social engineering" fraud, where thieves manipulate a person to conduct a transaction under false pretenses; and “technical compromise," where thieves infect a computer with malware to steal website logins and online credentials.

In the case of social engineering fraud, you may receive an email or call from someone claiming to be someone they're not. Fraudsters can use technology to “spoof" phone numbers so a call looks like it's coming from an IRS tax center. Once they've got you on the line, the caller will try to convince you to pay a fake tax bill or balance that's due, explains Schneeberger.

“It's a scam, but because it has the appearance of coming from the IRS it appears to be legitimate," she says.

Other techniques include sending an email asking you to confirm some of your personal information, or including a link to a return that actually downloads malicious software onto your computer. This software can infect your computer, allowing thieves to steal your personal information and account credentials.

Understand how the IRS communicates

One way to stay vigilant about tax fraud is to understand how the IRS actually communicates with taxpayers.

“They don't typically send emails," says Schneeberger. “If there is truly a bill or a legitimate issue, they will mail you an invoice or a hard copy communication first."

If you receive a call or an email and haven't received mail notification from the IRS first, you should question its legitimacy, and not provide any sensitive information online or over the phone. Hang up, and then call the IRS to confirm whether they had a need to contact you.

Another red flag is receiving a call from the IRS where they pressure you to pay or threaten to issue a warrant for your arrest.

“The IRS is not going to threaten to throw you in jail," Schneeberger says. "You would get multiple notices in the mail if there's something wrong."

In reality, the IRS's motivation is to get a tax bill paid, so they may try to come to a compromise or negotiate a resolution with you. If you've missed a payment by accident or didn't receive a notification, the IRS will often work with you to arrange payment.

“Unfortunately, these scams often target the elderly, who are even more susceptible or vulnerable," Schneeberger says. “Seniors may be a little bit more anxious or unsure of the situation, and if there's someone on the other end making threats, it just contributes to the stress and anxiety."

Know who’s filing your taxes

Another issue the IRS has flagged is so-called “ghost preparers," who are unscrupulous individuals passing themselves off as genuine tax preparers in order to take advantage of you. In some cases, ghost preparers obtain your trust to file a claim on your behalf, stealing your identity or filing your claim in order to steal from your return.

The problem is, filing an inaccurate tax return can trigger significant penalties ranging from 20 percent of the disallowed amount up to $5,000 if the IRS deems what you've filed a “frivolous tax return," which includes too little information or information that contradicts the tax reported.

“If you have a more complex tax situation — for example, if you own a business and you need the advice of a trusted professional — it's incumbent on you to perform some pre-vetting and due diligence to make sure that these are truly reputable tax preparers," says Schneeberger.

Business owners can be hit particularly hard by fraud

Fraud targeting business owners, who often file taxes quarterly, can be particularly devastating. According to the National Cyber Security Alliance, six out of ten small and mid-sized businesses that fall victim to cyber fraud go out of business within six months.

“Most commonly it's something like a wire fraud, where a small business may have a $100,000 wire sent out fraudulently; they're out that money, and they can't make payroll or they can't make rent on a facility or pay their vendors," says Schneeberger. “That company doesn't recover from that; there are companies where one single fraud loss is all the cash they have on hand."

Where it may make sense, Schneeberger encourages business owners who operate in a less formal structure, such as a sole proprietorship or general partnership, to consider operating under a more formal structure such as an LLC, which offers more protection from liability.

"If someone were to successfully defraud your business, the damage can't spill over into your personal assets," she says.

File early and report fraud

For both business owners and individual Americans alike, Schneeberger says that one of the best ways to defend yourself is to file your taxes early. The IRS has mechanisms that detect duplicate filings if fraudsters do get a hold of your information. These mechanisms are more efficient when the IRS already has your legitimate income tax return.

And if you do suspect fraud — whether it's repeated communications from suspicious individuals claiming to be the IRS, a prolonged delay in receiving your return, or unexpected notifications about overdue taxes — be sure to report it to both the IRS and law enforcement. Such a report could be used further down the line if you're seeking to recover your fraud loss through insurance.

Schneeberger emphasizes that there's no reason for victims of fraud to be embarrassed. “These fraudsters are smart — they're successful because they're very good at what they do. It's not the victims' wrongdoing," she says.

RBC Wealth Management does not provide tax or legal advice.

RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.

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