Every year the IRS comes out with the Dirty Dozen List of Tax Scams. Oftentimes you see the same issue from one year to the next. For example, identity theft continues to top the list, while phone and phishing scams aren’t far behind. Fraudsters prey people’s fear of the Internal Revenue Service to achieve their felonious ends. And many fall victim to their schemes. Don’t be one of them!
Identity Theft: Taxpayers need to watch out for identity theft especially around tax time. Someone may use your Social Security number to file for a refund. The IRS continues to aggressively pursue the criminals that file fraudulent returns using someone else’s Social Security number. If you have been a victim of identity theft, contact the IRS. They will flag your account and assign you a PIN number. After that, the IRS will not accept an electronically filed tax return unless this PIN number is used to identity it.
Phone Scams: If you get a telephone call from someone claiming to be from the IRS, simply hang up. The IRS will never call you unless you are in direct contact with a specific agent and have agreed to a phone call. These scam artists call and threaten with arrest, deportation, license revocation among other actions unless immediate payment is made of an outstanding “tax bill.” The caller display may even say it’s the Internal Revenue Service. Like I said, simply hang up. They only want to clean out your bank account.
Phishing: The IRS doesn’t send out e-mails to taxpayers either. If you get one, forward it to firstname.lastname@example.org. The IRS will hunt down the scoundrel and put him out of business. I received a rash of emails one year attempting to retrieve my banking information. The sender thanked me for my electronic tax payment, which I had actually just made but indicated that I needed to confirm my banking information. It provided a link to take me to the “IRS website” so I could type in everything they needed for their shopping spree. Don’t click on a link claiming to be from the IRS nor should you open any attachments. It’s nothing more than a ruse to steal banking information and identity as well.
Return Preparer Fraud: Most tax professionals are honest. However, the IRS says “but there are some dishonest preparers who set up shop each filing season to perpetrate refund fraud, identity theft and other scams that hurt taxpayers.” Always shop for a tax professional who has a history in the community. (Referrals by satisfied friends and family is normally the best route.)
Offshore Tax Avoidance: The IRS says, “The recent string of successful enforcement actions against offshore tax cheats and the financial organizations that help them shows that it’s 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 IRS offers the Offshore Voluntary Disclosure Program (OVDP) to enable people to reenter the system and provide the necessary information to the IRS about their foreign financial holdings. US taxpayers are required to declare world-wide income. So interest and dividends received from foreign accounts must be declared on your tax return. And if your foreign account contained $10,000 or more during the year, you are required to file an FBAR statement by June 30th.
Inflated Refund Claims: This one ties in with Return Preparer Fraud above. Walk away from a tax professional that asks you to sign a blank return, promises a big refund before looking at your records, or charges fees based on a percentage of the refund. The IRS says, “Scam artists use flyers, advertisements, phony store fronts and word of mouth via community groups where trust is high to find victims.”
Fake Charities: The IRS says, “Be on guard against groups masquerading as charitable organizations to attract donations from unsuspecting contributors. Be wary of charities with names similar to familiar or nationally-known organizations. Contributors should take a few extra minutes to ensure their hard-earned money goes to legitimate and currently eligible charities.” And remember, if the organization provides goods or services for a donation you make, that value must be subtracted from the total amount donated. What remains is what the IRS will accept as the donation amount. To confirm the status of a charitable organization use the Charities & Non-Profits Exempt Organizations List to determine if the organization is a bona fide 501(c)(3). If it’s not on the list, find another worthy cause.
Falsely Padding Deductions on Returns: Don’t become a scam artist yourself. It can be very tempting, especially when facing a big tax bill, to falsely inflate deductions or expenses on your tax return. The IRS is aware of industry standards and if you exceed them, they might want to take a look-see. Imagine how nerve-wracking it will be to face that auditor.
Excessive Claims for Business Credits: Avoid improperly claiming the fuel tax credit, a tax benefit generally not available to most taxpayers. The credit is generally limited to off-highway business use, including use in farming. Taxpayers should also avoid misuse of the research credit. Improper claims generally involve failures to participate in or substantiate qualified research activities and/or satisfy the requirements related to qualified research expenses.
Falsifying Income to Claim Credits: The IRS sees this often when dealing with fraud around the Earned Income Tax Credit (EITC). Because the EITC is on a sliding scale depending upon income level and number of dependent children, a fraudulent preparer will suggest increasing income in order to obtain a larger refund. The IRS says, “Taxpayers are best served by filing the most-accurate return possible because they are legally responsible for what is on their return. This scam can lead to taxpayers facing big bills to pay back taxes, interest and penalties. In some cases, they may even face criminal prosecution.”
Abusive Tax Shelters: Don’t use abusive tax structures to avoid paying taxes. The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them. The IRS states, “The vast majority of taxpayers pay their fair share, and everyone should be on the lookout for people peddling tax shelters that sound too good to be true.” If you are offered an oddly structured financial investment, it is best to discuss the structure with your attorney as well as your tax professional to determine its legitimacy and to find out if you will gain any tax benefit. Nothing worse than finding out on April 15 that you are have a loss that isn’t even deductible!
Frivolous Tax Arguments: The IRS states, “Don’t use frivolous tax arguments in an effort to avoid paying tax. Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims even though they are wrong and 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 penalty for filing a frivolous tax return is $5,000.” This is how Wesley Snipes ended up serving time.
Additional information about tax scams is available on IRS social media sites, including YouTube http://www.youtube.com/irsvideos and Tumblr http://internalrevenueservice.tumblr.com, where people can search “scam” to find all the scam-related posts.