Tax Season Means Tax Scams


Tax sea­son means tax scams.  The IRS has released the Dirty Dozen Tax Scams for 2012.  Don’t be fooled.

  • Iden­tity Theft

Top­ping this year’s list Dirty Dozen list is iden­tity theft. In response to grow­ing iden­tity theft con­cerns, the IRS has embarked on a com­pre­hen­sive strat­egy that is focused on pre­vent­ing, detect­ing and resolv­ing iden­tity theft cases as soon as pos­si­ble. In addi­tion to the law-enforcement crack­down, the IRS 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.

Iden­tity theft cases are among the most com­plex ones the IRS han­dles, but the agency is com­mit­ted to work­ing with tax­pay­ers who have become vic­tims of iden­tity theft.

The IRS is increas­ingly see­ing iden­tity thieves look­ing for ways to use a legit­i­mate taxpayer’s iden­tity and per­sonal infor­ma­tion to file a tax return and claim a fraud­u­lent refund.

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 IRS has a robust screen­ing process with mea­sures in place to stop fraud­u­lent returns. While the IRS is con­tin­u­ing to address tax-related iden­tity theft aggres­sively, the agency is also see­ing an increase in iden­tity crimes, includ­ing more com­plex schemes. In 2011, the IRS pro­tected more than $1.4 bil­lion of tax­payer funds from get­ting into the wrong hands due to iden­tity theft.

In Jan­u­ary, the IRS announced the results of a mas­sive, national sweep crack­ing down on sus­pected iden­tity theft per­pe­tra­tors as part of a stepped-up effort against refund fraud and iden­tity theft.  Work­ing with the Jus­tice Department’s Tax Divi­sion and local U.S. Attor­neys’ offices, the nation­wide effort tar­geted 105 peo­ple in 23 states.

Any­one who believes his or her per­sonal infor­ma­tion has been stolen and used for tax pur­poses should imme­di­ately con­tact the IRS Iden­tity Pro­tec­tion Spe­cial­ized Unit.  For more infor­ma­tion, visit the spe­cial iden­tity theft page at www.IRS.gov/identitytheft.

  • Phish­ing

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. Armed with this infor­ma­tion, a crim­i­nal can com­mit iden­tity theft or finan­cial theft.

If you receive 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 (EFTPS), report it by send­ing it to phishing@irs.gov.

It is impor­tant to keep in mind the IRS does not ini­ti­ate con­tact with tax­pay­ers by email to request per­sonal or finan­cial infor­ma­tion.  This includes any type of elec­tronic com­mu­ni­ca­tion, such as text mes­sages and social media chan­nels.  The IRS has infor­ma­tion that can help you pro­tect your­self from email scams.

  • Return Pre­parer Fraud

About 60 per­cent of tax­pay­ers will use tax pro­fes­sion­als this year to pre­pare and file their tax returns. Most return pre­par­ers pro­vide hon­est ser­vice to their clients. But as in any other busi­ness, there are also some who prey on unsus­pect­ing taxpayers.

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. Fed­eral courts have issued hun­dreds of injunc­tions order­ing indi­vid­u­als to cease prepar­ing returns, and the Depart­ment of Jus­tice has pend­ing com­plaints against many others.

In 2012, every paid pre­parer needs to have a Pre­parer Tax Iden­ti­fi­ca­tion Num­ber (PTIN) and enter it on the returns he or she prepares.

Sig­nals to watch for when you are deal­ing with an unscrupu­lous return pre­parer would include that they:

      • Do not sign the return or place a Pre­parer Tax iden­ti­fi­ca­tion Num­ber on it.
      • Do not give you a copy of your tax return.
      • Promise larger than nor­mal tax refunds.
      • Charge a per­cent­age of the refund amount as prepa­ra­tion fee.
      • Require you to split the refund to pay the prepa­ra­tion fee.
      • Add forms to the return you have never filed before.
      • Encour­age you to place false infor­ma­tion on your return, such as false income, expenses and/or credits.

For advice on how to find a com­pe­tent tax pro­fes­sional, see  Tips for Choos­ing a Tax Preparer.

  • Hid­ing Income Offshore

Over the years, numer­ous indi­vid­u­als have been iden­ti­fied as evadingU.S.taxes by hid­ing income in off­shore banks, bro­ker­age accounts or nom­i­nee enti­ties, using debit cards, credit cards or wire trans­fers to access the funds. Oth­ers have employed for­eign trusts, employee-leasing schemes, pri­vate annu­ities or insur­ance plans for the same purpose.

The IRS uses infor­ma­tion gained from its inves­ti­ga­tions to pur­sue tax­pay­ers with unde­clared accounts, as well as the banks and bankers sus­pected of help­ing clients hide their assets over­seas. The IRS works closely with the Depart­ment of Jus­tice to pros­e­cute tax eva­sion cases.

While there are legit­i­mate rea­sons for main­tain­ing finan­cial accounts abroad, there are report­ing require­ments that need to be ful­filled. U.S. tax­pay­ers who main­tain such accounts and who do not com­ply with report­ing and dis­clo­sure require­ments are break­ing the law and risk sig­nif­i­cant penal­ties and fines, as well as the pos­si­bil­ity of crim­i­nal prosecution.

Since 2009, 30,000 indi­vid­u­als have come for­ward vol­un­tar­ily to dis­close their for­eign finan­cial accounts, tak­ing advan­tage of spe­cial oppor­tu­ni­ties to bring their money back into theU.S.tax sys­tem and resolve their tax oblig­a­tions. And, with new for­eign account report­ing require­ments being phased in over the next few years, hid­ing income off­shore will become increas­ingly more difficult.

At the begin­ning of this year, the IRS reopened the Off­shore Vol­un­tary Dis­clo­sure Pro­gram (OVDP) fol­low­ing con­tin­ued strong inter­est from tax­pay­ers and tax prac­ti­tion­ers after the clo­sure of the 2011 and 2009 pro­grams. The IRS con­tin­ues work­ing on a wide range of inter­na­tional tax issues and fol­lows ongo­ing efforts with the Jus­tice Depart­ment to pur­sue crim­i­nal pros­e­cu­tion of inter­na­tional tax eva­sion.  This pro­gram will be open for an indef­i­nite period until oth­er­wise announced.

The IRS has col­lected $3.4 bil­lion so far from peo­ple who par­tic­i­pated in the 2009 off­shore pro­gram, reflect­ing clo­sures of about 95 per­cent of the cases from the 2009 pro­gram. On top of that, the IRS has col­lected an addi­tional $1 bil­lion from up front pay­ments required under the 2011 pro­gram.  That num­ber will grow as the IRS processes the 2011 cases.

“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. These schemes are also often spread by word of mouth as unsus­pect­ing and well-intentioned peo­ple tell their friends and relatives.

Scam­mers prey on low income indi­vid­u­als and the elderly. They build false hopes and charge peo­ple good money for bad advice. In the end, the vic­tims dis­cover their claims are rejected. Mean­while, the pro­mot­ers are long gone. The IRS warns all tax­pay­ers to remain vigilant.

There are a num­ber of tax scams involv­ing Social Secu­rity. For exam­ple, scam­mers have been known to lure the unsus­pect­ing with promises of non-existent Social Secu­rity refunds or rebates. In another sit­u­a­tion, a tax­payer may really be due a credit or refund but uses inflated infor­ma­tion to com­plete the return.

Beware. Inten­tional mis­takes of this kind can result in a $5,000 penalty.

  • False/Inflated Income and Expenses

Includ­ing income that was never earned, either as wages or as self-employment income in order to max­i­mize refund­able cred­its, is another pop­u­lar scam. Claim­ing income you did not earn or expenses you 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.

Addi­tion­ally, some tax­pay­ers are fil­ing exces­sive claims for the fuel tax credit. Farm­ers and other tax­pay­ers who use fuel for off-highway busi­ness pur­poses may be eli­gi­ble for the fuel tax credit. But other indi­vid­u­als have claimed the tax credit when their occu­pa­tions or income lev­els make the claims unrea­son­able. Fraud involv­ing the fuel tax credit is con­sid­ered a friv­o­lous tax claim and can result in a penalty of $5,000.

  • False Form 1099 Refund Claims

In this ongo­ing scam, the per­pe­tra­tor files a fake infor­ma­tion return, such as a Form 1099 Orig­i­nal Issue Dis­count (OID), to jus­tify a false refund claim on a cor­re­spond­ing tax return. In some cases, indi­vid­u­als have made refund claims based on the bogus the­ory that the fed­eral gov­ern­ment main­tains secret accounts forU.S.citizens and that tax­pay­ers can gain access to the accounts by issu­ing 1099-OID forms to the IRS.

Don’t fall prey to peo­ple who encour­age you to claim deduc­tions or cred­its to which you are not enti­tled or will­ingly allow oth­ers to use your infor­ma­tion to file false returns. If you are a party to such schemes, you could be liable for finan­cial penal­ties or even face crim­i­nal prosecution.

  • 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 tax­pay­ers should avoid. These argu­ments are false and have been 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.

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.

Some­times, fraud­sters even include an expla­na­tion on their Form 4852 that cites statu­tory lan­guage on the def­i­n­i­tion of wages or may include some ref­er­ence to a pay­ing com­pany that refuses to issue a cor­rected Form W-2 for fear of IRS retal­i­a­tion. Tax­pay­ers should resist any temp­ta­tion to par­tic­i­pate in any vari­a­tions of this scheme. Fil­ing this type of return may result in a $5,000 penalty.

  • Abuse of Char­i­ta­ble Orga­ni­za­tions and Deductions

IRS exam­in­ers con­tinue to uncover the inten­tional abuse of 501©(3) orga­ni­za­tions, includ­ing arrange­ments that improp­erly shield income or assets from tax­a­tion and attempts by donors to main­tain con­trol over donated assets or the income from donated prop­erty. 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. The Pen­sion Pro­tec­tion Act of 2006 imposed increased penal­ties for inac­cu­rate appraisals and set new stan­dards for qual­i­fied appraisals.

  • 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.

  • Mis­use of Trusts

For years, unscrupu­lous pro­mot­ers have urged 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. 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. As with other arrange­ments, tax­pay­ers should seek the advice of a trusted pro­fes­sional before enter­ing a trust arrangement.


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