Tax-related scams grow ever more sophisticated

Ihave previously discussed several tax scams that are going around, generally involving people purporting to be associated with the IRS and demanding money for past-due taxes.

Some of these are quite crude and, while they may fool some people, they probably have a low “yield.”

For example, we do not answer our home phone unless we recognize the number of the caller ID. But I have had about 10 messages left on our machine from someone representing themselves as with the IRS, and almost yelling that they are suing me for a tax bill and that I need to return their call to immediately pay my bill.

That call is just silly and is almost a form of entertainment. Unfortunately, the scams seem to be getting more sophisticated. The most recent one is an email communication, allegedly from the IRS, that has an attachment.

The attachment is a fairly realistic-looking Form CP2000 notice from the IRS. A CP2000 is a notice of underreported income that the IRS believes it has identified. It comes from a matching of documents provided to the IRS from third parties to what is reported on your tax return.

So, as an example, if my bank issues a 1099-INT reporting that it paid me $100 in 2015 and that $100 does not appear on my 2015 tax return, the IRS will send me the CP2000 to propose an adjustment to my 2015 tax return.

The CP2000 is not a bill. It will explain to me my possible responses, which could include my agreement that I somehow did not include the interest on my return, or a response that I do not agree with the proposed adjustment.

The IRS does not send the CP2000 by email. The scam CP2000 comes as an email attachment, which is a tip-off to a tax practitioner that something is wrong, but many taxpayers may not be aware of what a CP2000 is or how it is communicated by the IRS to the taxpayer.

The scam form apparently also includes a payment button where the recipient can choose to pay the tax immediately online. The IRS will not ask for money in this manner.

The fake form also directs the recipient to make a check payable to “IRS.” The actual IRS asks that checks be made payable to “United States Treasury.” But, again, many taxpayers would not know this and would even assume that taxes are paid to the IRS.

The fake CP2000 has other problems, such as using the wrong return address and, as noted above, failing to explain what options the recipient has to respond to the proposed adjustment. It also says the tax due is a result of Obamacare.

These scams are particularly effective because they prey on people’s fears of the IRS. Many people will try to pay immediately to avoid further IRS actions, including simply further communications from the IRS.

I think we can expect to see an ever-increasing level of sophistication from tax-related scams, which means it is important for both the IRS, financial publications and local newspapers to vigilantly report on the latest scams.

Q: My sister-in-law passed away in late August. My brother has learned that he will receive one year of her salary as a death benefit. The amount is about $39,000. Will this be taxable to him?

A. If this is simply a death benefit plan operated by the employer, yes, it will be taxable. The tax law once allowed a $5,000 death benefit exclusion, but that provision was repealed 20 years ago.

Life insurance proceeds are excluded from income. So I would check with your brother, and he may need to check with his wife’s former employer, to see whether this payment is a death benefit or a payment for insurance offered through a group term life insurance plan.

Many employers offer employees group-term life insurance that equals some percentage of the employee’s salary. This coverage can be a taxfree fringe benefit if the coverage does not exceed $50,000.

Even if some portion of the fringe benefit of the coverage is taxable income, the proceeds of the life insurance remain tax free.