Each year, the IRS compiles its “Dirty Dozen” list of tax scams, which include identity theft, phishing, return preparer fraud, misuse of trusts and other schemes.
Illegal scams can lead to penalties and interest and possible criminal prosecution, according to the IRS. The agency said it works closely with the Department of Justice to shut down scams and prosecute criminals behind them.
“This tax season, the IRS has stepped up its efforts to protect taxpayers from a wide range of schemes, including moving aggressively to combat identity theft and refund fraud,” IRS Acting Commissioner Steven T. Miller said in a statement. “The Dirty Dozen list shows that scams come in many forms during filing season. Don’t let a scam artist steal from you or talk you into doing something you will regret later.”
This year’s “Dirty Dozen” are:
1 — Identity theft, that is using your name, Social Security number or other information without your permission to commit fraud and other crimes. The IRS said it has stepped up its prevention, detection and assistance efforts for the 2013 tax season. In January, it took 734 enforcement actions in the area of ID theft. In 2012, the IRS prevented $20 billion in fraudulent refunds, up from $14 billion the previous year. The agency has 3,000 people working on ID-theft cases, more than double the number in 2011, and 35,000 employees are trained to work with taxpayers to help with ID theft situations.
The IRS has an Identity Protection Specialized Unit, which can be contacted at 800-908-4490.
2 — Phishing, a scam typically carried out with the help of unsolicited email or a fake website posing as a real one to lure potential victims and prompt them to give personal and financial information. A criminal can use the information to commit ID or financial theft. Unsolicited email that appears to be from the IRS or a related organization, such as the Electronic Federal Tax Payment System, can be reported by sending it to email@example.com.
3 — Return preparer fraud. Roughly 60 percent of taxpayers will use tax professionals to prepare their tax returns this year. Most are legitimate, but some unscrupulous preparers prey on unsuspecting taxpayers, according to the IRS, which can lead to refund fraud or identity theft. Taxpayersshould only use preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers. The IRS has a new Web page with tips on choosing a preparer and how and when to make a complaint. The IRS provides general information on reporting tax fraud here.
4 — Hiding income in offshore banks, brokerage accounts or nominee entities and using debit cards, credit cards or wire funds to access the money; or using foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose. Since 2009, 38,000 individuals have voluntarily disclosed their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore will become increasingly more difficult.
The IRS has collected $5.5 billion so far from people who participated in offshore voluntary disclosure programs since 2009. At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs.
5- “Free money” from the IRS and tax scams involving Social Security. Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches. These schemes promise refunds to people who have little or no income and normally don’t have a tax filing requirement. Scammers prey on low-income individuals and the elderly with bogus promises of free money. They build false hopes and charge people good money for bad advice.
There are also a number of tax scams involving Social Security. For example, scammers have been known to lure the unsuspecting with promises of non-existent Social Security refunds or rebates. In another situation, a taxpayer may really be due a credit or refund but uses inflated information to complete the return.
6 — Impersonation of charitable organizations, particularly in the wake of significant natural disasters. Scam artists impersonate charities to get money or private information from taxpayers. Some scammersmay contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.
They may attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources. Bogus websites may solicit funds for disaster victims.
7 — False/inflated income and expenses. Including income that was never earned, either as wages or as self-employment income, in order to maximize refundable credits, is another popular scam. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions. This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.
Some taxpayers are filing excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.
8 — False Form 1099 refund claims. Taxpayers have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S.citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS. In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount, to justify a false refund claim on a corresponding tax return.
Don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.
9 — Frivolous arguments. The IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.
10 — Falsely claiming zero wages. Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.
Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme. Filing this type of return may result in a $5,000 penalty.
11 — Disguised corporate ownership. Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business. These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering, and financial crimes.
12 — Misuse of trusts. For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are legitimate uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.
IRS personnel have seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.