From a list that the IRS released on Thursday titled, “The Dirty Dozen,” here are swindles to dodge and scams to avoid when considering your taxes. “The Dirty Dozen represents the worst of the worst tax scams,” IRS Commissioner Doug Shulman said. “They may look tempting, but these fraudulent deals end up hurting people who participate in them.”
The IRS aggressively pursues taxpayers involved in abusive offshore dealings, in addition to promoters and others who enable these schemes. Other related scams include using offshore debit cards, credit cards, wire transfers and foreign trusts. In February, the IRS revealed a new voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system.
Dishonest return preparers can cause major issues for taxpayers who fall victim to their ploys. These individuals can skim part of their clients’ refunds, charge inflated fees for return preparation services and make fake promises to potential new clients. The IRS is implementing multiple requirements for paid tax preparers, including registration with the IRS and competency examinations.
It is possible for scam artists to file false or misleading returns to claim refunds to which they are not entitled. The IRS has programs to aggressively combat this fraud and is able to put a stop to the majority of incorrect refunds. Do not fall prey to people who encourage you to claim deductions or credits you are not entitled to or willingly allow others to use your information to file false returns.
Promoters of frivolous schemes encourage people to make unreasonable and outlandish claims to avoid paying taxes that they owe. The IRS has a list of frivolous legal positions that taxpayers should avoid. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or IRS guidance.
The IRS has identified returns where taxpayers report nontaxable Social Security Benefits with excessive withholding. This tactic results in no income reported to the IRS on the tax return. Filing this kind of return can result in a $5,000 fine.
This type of abuse includes improperly shielding income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property. These donations can often be highly overvalued. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions.
The IRS looks for transactions that taxpayers utilize to avoid the limits on contributions to IRAs, as well as transactions that are not properly reported as early distributions. Taxpayers should be suspicious of advisers who tell them to shift appreciated assets at less than fair market value into IRAs or companies owned by their IRAs to circumvent annual contribution limits.
Corporations can be formed for the purpose of disguising the ownership of the financial activity by means such as improperly using a third party to request an employer identification number. The IRS is working with state authorities to identify these entities and bring the owners of these entities into compliance with the law.
Filing a false income-or-wage-related informational return to replace an actual return is often used to lower the amount of taxes owed in an illegal fashion. Sometimes, swindlers include an explanation on their Form 4852 that cites statutory language on the definition of wages or they might include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Filing this type of return can result in a $5,000 penalty.
Promoters have encouraged taxpayers for years to transfer assets into trusts. While trusts have legitimate uses, some highly questionable transactions promise reduction of income subject to tax and reduced estate or gift taxes. Recently, the IRS has seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and reduce personal expense. The IRS encourages taxpayers to seek advice from professionals before entering trust arrangements.
Taxpayers who use fuel for off-highway business purposes can be eligible for the fuel tax credit; however, the IRS has received claims in the past requesting tax credit for nontaxable uses of fuel. These claims are unreasonable when individuals have irrelevant occupations. This type of fraud can result in a $5,000 penalty.
Don’t fall victim to the latest swindles when filing your taxes this season. Check out the “The Dirty Dozen” tax scams compiled by the IRS that may look tempting, but are nothing but a ripoff.