While taxpayers can be targeted by scams throughout the entire calendar year, the nature of tax season often creates a peak of scams during the time that people prepare their tax. Keep an eye out for the IRS’s “Dirty Dozen” tax scams as this filing season comes to a close.
1. Identity Theft. This scam is when someone uses your personal information (like your name, Social Security number or other identifying information), without your permission. It’s often used to claim a refund.
If you believe you are at risk of identity theft due to lost or stolen personal information, contact the IRS Identity Protection Specialized Unit at 800-908-4490.
2. Phishing. Phishing is a scam where criminals attempt to steal your financial information through the use of email or a fake website. In many cases, the bogus emails ask for specific personal information or install spyware or other malware on your computer for the purpose of stealing your financial and personal information.
It is important to remember that the IRS doesn’t initiate contact with taxpayers by email to request personal or financial information, so don’t click on or respond to these kinds of emails. If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), you can report it by forwarding it to phishing@irs.gov.
3. Return Preparer Fraud. Most tax preparers are good people, but with any good deed, there are scammers that try to take advantage of a consumer need. Some may impersonate tax preparers. Some may try to encourage taxpayers to claim improper credits, deductions or exemptions in hopes of boosting refunds. Be careful when choosing a preparer and remember that taxpayers should use only preparers who have valid IRS Preparer Tax Identification Numbers (PTINs). This is an IRS requirement.
If you have concerns about an abusive tax preparer, you can report him or her to the IRS on using a federal form 14157, Complaint: Tax Return Preparer (downloads as a pdf).
4. Offshore Accounts. It is illegal to use foreign accounts to evade U.S. taxes by hiding that income. Taxpayers that do not properly report and disclose those accounts are violating the law and potentially face civil and criminal penalties and fines.
5. “Free Money” from Inflated Refunds and Social Security. In this type of scam, artists routinely pose as tax preparers and promise free money by inflating refunds. They do this by making claims for fictitious rebates, benefits or tax credits.
Remember that you are legally responsible for your tax return even if it was prepared by someone else. Review your return carefully, you could be penalized for filing for credits or deductions that you are not entitled to. Intentional mistakes of this kind can result in a $5,000 penalty.
6. Impersonation of Charitable Organizations. Scam artists can use tragedies as opportunities to make some money by operating bogus charities to solicit money/banking information or claiming to be affiliated with existing charitable organizations. This can be done by using fake websites, e-mail solicitation, and phone calls. Always check to make sure the donation you are making is to a recognized charity. Also remember that you don’t need to give out personal information, like your Social Security number, for the purpose of obtaining a receipt for your charitable donation.
7. Inflated income/Expenses, or Exemptions. This common tax crime is committed when claiming refundable tax credits that you are not entitled to. Scam artists gain money because these are refundable tax credits, which means that the credits are refunded to you even if you do not owe a tax liability. The IRS has recently been cracking down on excessive claims for tax credits. Many taxpayers found guilty of reporting false credits are charged penalties, late fees, and sometimes, jail time.
8. Using A False Form 1099. Filing a phony information return, like a form 1099, is one way to lower your tax bill. It’s illegal and easily discovered by the IRS. Filing fake forms can get you in a lot of trouble, including huge penalties or criminal prosecution.
9. Outrageous Arguments for Not Paying Taxes. Some schemers attempt to encourage taxpayers to make unreasonable claims in the event of an audit to avoid paying the taxes they owe. If you claim what is considered to be a frivolous position on your tax return, you could be subject to substantial fines and penalties or jail time.
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. Penalties for this type of scheme can run up to $5,000!
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. Then, these false entities are used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering and financial crimes. The IRS is working with state authorities to identify these entities and bring the owners into compliance with the law.
IRS Criminal Investigation (CI) has made these kinds of schemes a target and has developed the Abusive Tax Schemes program to combat them. Not only does CI investigate the tax scheme promoters but also those who have a “substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax scheme” (you know, the bankers and lawyers) but also those who knowingly participate in the tax schemes.
12. Misuse of Trusts. This “Dirty Dozen” scheme involves the intention creation of trusts for the purpose of tax evasion (as opposed to estate planning), including hiding income or generating bogus deductions, is not an appropriate use of trusts. Be sure to exercise special caution when creating foreign trusts, irrevocable trusts or any trusts that have a significant reduction or elimination of tax, especially if those trusts involve shifting or hiding assets. The IRS has also advised that it has seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses, as well as to avoid estate transfer taxes.
Be sure to consult with a trusted advisor before entering into any trust agreements for the purpose of tax and/or estate planning.
As always, avoiding trouble at tax time involves using common sense. Always ask questions before trusting anyone with personal or financial information.