The Internal Revenue Service issued its annual "Dirty Dozen" ranking of tax scams, reminding taxpayers
to use caution during tax season to protect themselves against a wide range of
schemes ranging from identity theft to return preparer fraud.
The Dirty Dozen listing, compiled by the IRS each year, lists a
variety of common scams taxpayers can encounter at any point during the year.
But many of these schemes peak during filing season as people prepare their tax
returns.
"Taxpayers should be careful and avoid falling into a trap with
the Dirty Dozen," said IRS Commissioner Doug Shulman. "Scam artists will tempt
people in-person, on-line and by e-mail with misleading promises about lost
refunds and free money. Don't be fooled by these scams."
Illegal scams can lead to significant penalties and interest and
possible criminal prosecution. The IRS Criminal Investigation Division works
closely with the Department of Justice to shutdown scams and prosecute the
criminals behind them.
The following is the Dirty Dozen tax scams for 2012:
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
evading U.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 the U.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 for U.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(c)(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.
