IRS’ ‘Dirty Dozen’: 12 Tax Fraud Schemes to Avoid

Every year at the beginning of the tax season, the IRS publishes its “dirty dozen” list of schemes that taxpayers may encounter at any time, but many of which proliferate during the tax-filing period.

The list reads much the same each year, but still bears attending to. “Taxpayers can and should stay alert to new schemes which seem to constantly evolve,” the agency’s commissioner, John Koskinen, said in a statement.

“We urge them to do all they can to avoid these pitfalls — whether old or new.”

The scams on the IRS list fall into four broad categories: those in which criminals go after individuals’ personal information; ones whereby scammers gull the vulnerable or uninformed to participate; purposefully incorrect filings; and high-end tax avoidance.

Following is this year’s “dirty dozen” as prepared by the IRS:


1. Phishing

Taxpayers need to be on guard against fake websites or emails from criminals posing as a person or organization the taxpayer trusts or recognizes, looking to steal personal information.

“These email schemes continue to evolve and can fool even the most cautious person,” Koskinen said. “Email messages can look like they come from the IRS or others in the tax community.”

The IRS said it would never initiate contact with taxpayers via email about a bill or refund, and no one should click on an email claiming to be from the IRS.


Identity Theft

2. Identity Theft

Identity theft is especially prevalent around tax time, and taxpayers need to be extremely cautious and do everything they can to avoid being victimized. The IRS continues to aggressively pursue criminals who file fraudulent returns using someone else’s Social Security number.

The IRS, state tax agencies and the tax industry have joined as the Security Summit and enacted  safeguards that are showing results. According to the agency, the number of taxpayers reporting stolen identities on federal tax returns in 2016 fell by more than 50%, with nearly 275,000 fewer victims compared with a year ago.


Phone Scams

3. Phone Scams

Phone calls from scammers impersonating IRS agents remain an ongoing threat to taxpayers. The IRS has reported a surge of these phone scams in recent years as con artists have threatened taxpayers with police arrest, deportation and license revocation, among other things.

The Treasury Inspector General for Tax Administration reported that some 10,000 victims have collectively paid more than $54 million as a result of phone scams since October 2013.


Preparer Fraud

4. Preparer Fraud

The vast majority of tax professionals provide honest, high-quality service, but some unscrupulous ones also ply the trade. They set up shop each filing season to perpetrate refund fraud, identity theft and other scams.

The IRS suggests several things to avoid working with a fraudulent preparer:

  • Ask whether the preparer has an IRS Preparer Tax Identification Number
  • Check the preparer’s qualifications, using the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications
  • Check the preparer’s history
  • Ask about service fees
  • Ask to e-file your return
  • Don’t rely on a preparer who is willing to e-file your return using your last pay stub instead of your Form W-2. This is against IRS e-file rules
  • Never sign a blank return
  • Review your return before signing


Falsifying Income to Claim Credits

5. Falsifying Income to Claim Credits

Con artists sometimes talk taxpayers into inventing income to erroneously qualify for tax credits. This scam can lead to taxpayers facing large bills to pay back taxes, interest and penalties. In some cases, they may even face criminal prosecution. Taxpayers should file the most accurate return possible because they are legally responsible for what is on their return.

The IRS cautions taxpayers to avoid getting caught up in a scheme disguised as a debt payment option for credit cards or mortgage debt. This involves filing a Form 1099-MISC, Miscellaneous Income, and/or bogus financial instruments such as bonds, bonded promissory notes or worthless checks.

Inflated Refund Claims

6. Inflated Refund Claims

Taxpayers should be wary of anyone who asks them to sign a blank return, promises a big refund before looking at their records or charges fees based on a percentage of the refund. Fraudsters use flyers, advertisements, phony storefronts and word of mouth via community groups where trust is high to find victims.

Scammers often prey on people who do not have a filing requirement, such as those with low income or the elderly and on non-English speakers. They dupe people into making claims for fictitious rebates, benefits or tax credits. Or they file a false return in their client’s name, and the client never knows that a refund was paid.

Scam artists may also victimize those with a filing requirement and due a refund by promising larger refunds based on fake Social Security benefits and false claims for education credits or the Earned Income Tax Credit, among others.


Fake Charities

7. Fake Charities

“Fake charities set up by scam artists to steal your money or personal information are a recurring problem,” according to Koskinen. “Taxpayers should take the time to research organizations before giving their hard-earned money.”

The IRS said donors should be on guard against groups masquerading as charitable organizations to attract donations. These “charities” may give their organizations names similar to familiar or nationally known ones.

Following major disasters, it is common for scam artists to impersonate charities through a variety of tactics. Some of these operators may contact people by telephone or email to solicit money or financial information. Bogus websites may solicit funds for disaster victims.

Scammers 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. By getting personal information or Social Security numbers, they steal victims’ identities or financial resources.


Frivolous Tax Arguments

8. Frivolous Tax Arguments

Promoters of frivolous schemes encourage taxpayers to avoid paying tax by making unreasonable and outlandish claims even though these have been repeatedly 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 or disregard their responsibility to pay taxes, the IRS said.

“Taxpayers tangled up in these scams end up paying back taxes and often stiff penalties as well,” Koskinen said. The penalty for filing a frivolous tax return is $5,000.


Falsely Padding Deductions on Returns

9. Falsely Padding Deductions on Returns

Each year, some taxpayers fudge their tax returns. The IRS said this was why falsely claiming deductions, expenses or credits on tax returns remained on its “dirty dozen” list. It said significant financial penalties may apply to taxpayers who file incorrect information.

The IRS offers Free File as an option for taxpayers to use software to prepare and e-file their tax returns for free. Taxpayers can also avail themselves of community-based volunteers at locations around the country who provide free face-to-face tax assistance to qualifying taxpayers.

Excessive Claims for Business Credits

10. Excessive Claims for Business Credits

Taxpayers should avoid improperly claiming the fuel tax credit, which is usually limited to off-highway business use, including use in farming, and generally not available to most taxpayers.

They should also avoid misuse of the research credit. This often involves failure to participate in or substantiate qualified research activities and/or satisfy the requirements related to qualified research expenses.

Offshore Tax Avoidance

11. Offshore Tax Avoidance

The IRS said it was a bad bet to hide money and income offshore. Taxpayers are best served by coming in voluntarily and getting caught up on their tax-filing responsibilities. The agency offers the Offshore Voluntary Disclosure Program to enable people to catch up on their filing and tax obligations.

Since the first OVDP opened in 2009, there have been upward of 55,800 disclosures, and the IRS has collected more than $9.9 billion from this initiative. In addition, another 48,000 taxpayers have made use of separate streamlined procedures to correct prior non-willful omissions and meet their federal tax obligations, paying approximately $450 million in taxes, interest and penalties.

The agency said it had conducted thousands of offshore-related civil audits that resulted in the payment of tens of millions of dollars in unpaid taxes. It has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.

“Offshore compliance remains a top IRS priority,” Koskinen said. “The IRS receives more foreign account information each year, making it harder to hide income offshore. I urge taxpayers with international tax issues to come forward and get right with the system.”


Abusive Tax Shelters

12. Abusive Tax Shelters

The IRS reaffirmed its commitment to stopping complex tax avoidance schemes and the people who create and sell them. “Taxpayers should avoid unscrupulous promoters who encourage the use of phony tax shelters designed to avoid paying what is owed,” Koskinen said. “These scams can end up costing taxpayers more in penalties, back taxes and interest than they saved in the first place.”

When in doubt, the IRS said, taxpayers should seek an independent opinion regarding complex products they are offered.


Article Created by ThinkAdvisor Feb 28 2017