California man loses life savings, owes more than $30K in taxes after falling prey to sophisticated scam — now he fears he may lose his home if he can’t pay his tax bill

In order to clear the issues, the scammers posing as the FTC said they would help him move his money to a “secure account,” which involved him sending thousands of dollars of gold and cash through couriers and UPS. He tapped into multiple accounts, including Certificate of Deposit (CD) and IRA accounts, to send over $200,000 in funds before the police informed him that it was all a scam. By using those accounts to send money, Frilich amassed a tax burden of around $30,000, which will end in the IRS putting a lien on his home if he can’t pay the bill or work out an arrangement with the agency.

While losing money in a scam is awful, getting penalized on top of it makes it even worse. How can you guard yourself from tax problems as you try to avoid fraud?

Why early withdrawal penalties matter

While most bank and investing accounts are designed to hold “liquid” assets — defined as cash or assets that can be converted to cash quickly and easily — some accounts are structured to effectively “lock down” money to pay interest and dividends over an extended period of time and are not considered “liquid.” Examples include the two types of accounts Frilich pulled money from: Certificate of Deposit (CD) accounts and Individual Retirement Accounts (IRAs).

Both are designed to keep money locked for an extended period of time, but in different ways. A CD is offered by banks or credit unions as a savings option, where consumers agree to deposit their money for a specific period of time before they can make a withdrawal. CD terms can range anywhere from one month all the way to five years. IRAs are investment accounts designed to help you save money for your retirement. The earliest one can withdraw money from an IRA without issue is when the account holder turns 59½.

Anyone withdrawing money from either of those accounts before they mature will face penalties. Under federal law, banks are allowed to charge penalties for early withdrawal of CDs. While the minimum penalty is seven days of simple interest if the withdrawal is done within six days of deposit, a larger penalty can apply for early withdrawal at any other time during the term. In addition to bank penalties, dividends earned on CDs is taxable income, and must be reported on your taxes for the year it was withdrawn.

The rules for IRAs are a little more complex. Account holders can make withdrawals without penalty under certain allowable exceptions, such as the birth or adoption of a child, recovering from a natural disaster, or using the money for qualified higher education expenses. In all other situations, a withdrawal is not only included as part of your gross income tax at the end of the year, but is also subject to an additional 10% tax penalty. In both situations, Frilich face tax penalties that would be due with his income tax return. Because he couldn’t pay the full tax bill in time, the IRS says they can put a lien on the home to secure the government’s interest in his property. And not only can that be stressful, it can damage your credit score and stay on your credit report for years.

Protecting yourself from both scams and tax penalties

Before sending money to anyone, it’s crucial to ensure you know who the recipient is, and where the money is going. Government impersonation scams usually start with somebody calling you saying they’re from an agency and you need to give them money urgently, or something bad will happen.

The Federal Trade Commission emphasizes that government agencies will never call, email, or text to request information or money. Additionally, if someone says they’re from a company and offers you repayment from a previous scam, offers to connect to your computer to secure your refund, or offers to send you a check for over the disputed amount with the promise to send it back, it’s likely a refund scam. Before agreeing to anything, hang up and do your research to ensure you’re not a target for theft.

Scammers may try to establish authority by using information from a target’s (illegally obtained) credit report. One way to protect yourself from credit report attacks is through a credit freeze. A freeze is a free service offered by all three credit reporting agencies (Equifax, Experian, and TransUnion), which locks down access to your report to new requests. While it can protect your personal information, you will need to unfreeze your credit if you are applying for a new credit card or loan.

Finally, Frilich says his biggest mistake was panicking when contacted by the scammers, and signing a non-disclosure agreement which prevented him from knowing who they truly were. The FTC says if you realize you’re being scammed, cut off communications with the scammers immediately, and start doing damage control to prevent further attacks. This includes contacting the payment provider to try and reverse any money sent, changing your bank account and credit card numbers, creating new usernames and passwords for any online accounts a scammer might have access to, and doing security scans to remove any access they could have to your computer or cellphone.

And, of course, be sure to report the incident to the FTC.