IRS “Dirty Dozen” Tax Scams

February 22, 2012

By Angie Moreschi:

Tax day is fast approaching for all of us, and so, the Internal Revenue Service is putting out its annual warning of the top tax scams for us to beware of and avoid.

The IRS releases the yearly “dirty dozen” reminding taxpayers to exercise caution during tax season.  There are plenty of scam artists out there looking to help you part with your money, so don’t fall for it.  Here are the top scams to look out for in 2012, according to the IRS:

1. Identity theft

Identity theft tops the IRS’s list of “dirty dozen” scams this year. Identity theft cases are the ones in which criminals obtain living or deceased people’s names and Social Security numbers to defraud the government.

In addition to the law-enforcement crackdown, the IRS said its has stepped up its internal reviews to spot false tax returns before tax refunds are issued as well as working to help victims of the identity theft refund schemes. “An IRS notice informing a taxpayer that more than one return was filed in the taxpayer’s name or that the taxpayer received wages from an unknown employer may be the first tip off the individual receives that he or she has been victimized”, the department noted.

2. Phishing

Phishing ranks second in the list. Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. A criminal can commit identity theft or financial theft using that information.

If someone receives 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, he or she should report it by sending it to phishing@irs.gov.

3. Return preparer fraud

Questionable return preparers have been known to skim off their clients’ refunds, charge inflated fees for return preparation services and attract new clients by promising guaranteed or inflated refunds. Taxpayers should choose carefully when hiring a tax preparer.

This year, every paid preparer needs to have a Preparer Tax Identification Number (PTIN) and enter it on the returns he or she prepares.

4. Hiding income offshore

U.S. taxpayers who maintain financial accounts abroad and who do not comply with reporting and disclosure requirements risk significant penalties and fines, as well as the possibility of criminal prosecution.

The IRS has reopened the Offshore Voluntary Disclosure Program this year following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs.

“Since 2009, 30,000 individuals have come forward voluntarily to disclose their foreign financial accounts,” The IRS noted. “And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore will become increasingly more difficult.”

5. “Free Money” from the IRS & 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 around the country. Low income individuals and the elderly are normally the victims of such ads. The IRS warned that intentionally filing incorrect returns can result in a $5,000 penalty.

6. False/inflated income and expenses

Claiming income one did not earn or expenses one 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.

7. False Form 1099 refund claims

“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.”

8. Frivolous arguments

“Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that have been thrown out of court.”

9. 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.”

10. Abuse of charitable organizations and deductions

“The IRS is investigating schemes that involve the donation of non-cash assets — including situations in which several organizations claim the full value of the same non-cash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor.”

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. The IRS is working with state authorities to identify these entities and bring the owners into compliance with the law.”

12. Misuse of trusts

Unscrupulous promoters urge 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,” the IRS said. “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.”