The Internal Revenue Service reminds taxpayers to use caution during tax season to protect themselves against a wide range of schemes ranging from identity theft to return preparer fraud with its annual “Dirty Dozen” list of tax scams.
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2014’s Dirty Dozen:
Identity Theft. Tax fraud through the use of identity theft tops this year’s list. Identity theft occurs when someone uses your personal information, such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes. In many cases, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.
Pervasive Telephone Scams. Phone scams have increased with callers pretending to be from the IRS. These scams range from the callers saying the victim owes money to saying they are entitled to a huge refund. Some calls can threaten arrest and threaten a driver’s license revocation. Sometimes these calls are paired with follow-up calls from people saying they are from the local police department or the state motor vehicle department.
Another sophisticated scam informs victims they owe money to the IRS that must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation or suspension of a business or driver’s license.
Phishing. Typically carried out with an unsolicited email or a fake website posing as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information.
It is important to remember the IRS does not initiate contact with taxpayers by email or any type of electronic communication, such as text messages and social media channels to request personal or financial information.
False Promises of “Free Money” from Inflated Refunds. Scam artists routinely pose as tax preparers, luring victims in by promising large federal tax refunds. They charge good money for very bad advice. Or worse, they file a false return in a person’s name and that person never knows that a refund was paid.
Fraudsters use flyers, advertisements, phony store fronts and word of mouth to throw out a wide net for victims. They may also spread the word through community groups or churches where trust is high.
The IRS reminds all taxpayers that they are legally responsible for what’s on their returns even if it was prepared by someone else.
Return Preparer Fraud. Many taxpayers will use tax professionals this year to prepare their tax returns. Most return preparers provide honest service to their clients but some unscrupulous preparers prey on unsuspecting taxpayers. Choose carefully when hiring an individual or firm to prepare your return. The IRS has a web page to assist taxpayers for choosing a preparer, visit www.irs.gov/chooseataxpro.
Hiding Income Offshore. Numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then 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.
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 requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.
Impersonation of Charitable Organizations. In the wake of significant natural disasters, scam artists impersonate charities to get money or private information from well-intentioned taxpayers using a variety of tactics. Some scammers operate bogus charity websites soliciting funds for disaster victims. Some contact disaster victims, claiming to work for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds. The IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists.
False Income, Expenses or Exemptions. Another scam involves inflating or including income on a tax return that was never earned, either as wages or as self-employment income in order to maximize refundable credits. 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.
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. 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.
Falsely Claiming Zero Wages or Using False Form 1099. Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. 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.
Abusive Tax Structures. Abusive tax schemes have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions. The schemes are usually complex involving multi-layer transactions for the purpose of concealing the true nature and ownership of the taxable income and/or assets.
Misuse of Trusts. Trusts are highlighted here because unscrupulous promoters continue to urge taxpayers to transfer large amounts of assets into trusts. These assets include not only cash and investments, but also successful on-going businesses. There are legitimate uses of trusts in tax and estate planning, but the IRS commonly sees highly questionable transactions. These transactions promise reduced taxable income, inflated deductions for personal expenses, the reduction or elimination of self-employment taxes and reduced estate or gift transfer taxes. These transactions commonly arise when taxpayers are transferring wealth from one generation to another. Questionable trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors and the IRS.
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The IRS reminds taxpayers that tax scams can take many forms beyond the “Dirty Dozen” and people should be on the lookout for many other schemes. More details on these tax scams are available at IRS.gov.