The IRS' Dirty Dozen List of Tax Scams for 2016

Each year the IRS comes out with list of tax scams called the Dirty Dozen, which is used to bring public attention to the latest schemes used to perpetrate tax fraud. There are twelve types of scams described in the list, hence the title.

Identity theftIn its basic form, this type of fraud involves the filing of a tax return using someone else's personal identification without their knowledge of approval. One of the more sensitive types of data involving identity theft is the Social Security Number. It is in your best interest to keep this number as private as you can and to refrain from handing it over to anyone if possible, especially over the phone or by email. The IRS anticipates this as being the most noteworthy scam of 2016.

PhishingPhishing occurs when a malicious entity poses as a legitimate organization in an effort to extract personal, and often sensitive, data from you through a fake email. Keep in mind that the IRS does not send emails directly to taxpayers. So if you do receive an email claiming to be from the IRS, you should forward that email to so that the authorities can be notified.

Phone scamsThis is a classic scam and continues to thrive. The IRS states that they have noticed an uptick in these types of scams in recent years. Be very wary of those presenting themselves as tax authorities over the phone while requesting sensitive, personal information.

Return preparer fraudThe main culprits here are those who present themselves as tax professionals with a hidden agenda involving the preparation of fraudulent returns. These individuals or entities will often "set up shop" once a year during the tax filing season.

Offshore tax avoidanceOffshore tax avoidance is exactly what it sounds like: hiding money in a foreign country in an effort to avoid the tax man. As of late, the IRS has been cracking down on this maneuver and has adapted to the sophisticated techniques often employed by tax avoiders. This means that all income or capital appreciation realized in an account overseas must be reported on your tax return.

Inflated refund claimsThis type of scam can be perpetrated by less-than-honest tax preparers who purposely falsify refund claims in order to secure larger than normal fund amounts. This is similar to return preparer fraud in that scam artists who falsely represent themselves as honest tax professionals. In the unfortunate event you tax preparer orchestrated such a scheme without your knowing, you could still be liable for such fraud. To protect yourself, beware of professionals promising large and obscure refund amounts. Also, preparers should provide you with a copy of the tax return prepared, and not being provided one can serve as a red flag warning.

Fake charitiesWhile there are charities that genuinely carry out their organization's objectives, there are those that fall short of such honesty with no transparency. If you decide to a donate to a charity, be sure to find out as much as you can about the charity and their history. Fake charities will often adopt names that are similar to more well-known charitable organizations.

Exaggerating deductions and expensesHere we have exaggerating, or "falsely padding", deductions in an attempt to pay less in taxes than what would normally be owed. Some types expenses that are often padded are business expenses and charitable contributions.

Excessive claims for business creditsA business credit that is often abused by tax filers is the fuel tax credit. Excessive claims for business credits is seen a lot when it comes to research. The IRS expects those who claim research credit to demonstrate substantial participation in "qualified research activities."

Falsifying income in order to claim creditsThis is often seen with the Earned Income Tax Credit (EITC) in order to attain a larger return.

Abusive tax sheltersThis tax scam often finds itself aligned with another Dirty Dozen scam: offshore tax avoidance. There will be instances where investment products may be too complicated for the average person to understand, and could be perceived by the tax authorities as a structured tax shelter. To help avoid this pitfall, the IRS expects you to "seek an independent opinion" on whether or not such a maneuver is considered a tax shelter.

Frivolous tax argumentsThis involves make certain arguments in the court of law in order to avoid taxes. These types of arguments are often presented by those who erroneously assume that certain aspect of tax law does not apply to them. Before making any assumption about your obligations as a taxpayer and which laws do or don't apply, consult with the appropriate legal or tax professional.

What you should take from the Dirty DozenIf you at all expect to receive a tax refund, it is probably in your best interest to file your taxes early. The reason for this is because if any issues arise regarding your personal information, you will be able to have it resolved more quickly. This can end up saving you money, time, and headaches in the long run.

Because means of communication and money transfer are becoming more and more digitized, it makes it that much easier for scammers to perform their craft online from the comfort of their living room. Cyber vigilance is no longer an option, it is mandatory. As a taxpayer, you should never be coerced into handing over private information to someone over an email exchange or through a phone conversation. If you ever suspect that your identity or other personal information has been compromised, you have three options to take action: (1) call the IRS Fraud hotline at (877) 438-4338, (2) fill out an Identity Theft Affidavit-Form 14039, and (3) visit the Taxpayer Guide to Identity Theft section of the IRS website for guidance on the particular course of action you should take.

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