Some are good old-fashioned schemers out to make a fast buck, and often leave you holding the bag. The meaner sort prey on vulnerable, often clueless, people who don’t know what hit them.
The IRS on Tuesday released its annual “Dirty Dozen” list of tax scams that taxpayers can encounter at any point during the year. Many of these schemes peak during filing season as people prepare their tax returns, the IRS said in a statement.
It said illegal scams can lead to significant penalties and interest and possible criminal prosecution, noting that IRS Criminal Investigation works closely with the Department of Justice to shut down scams and prosecute the criminals behind them.
Following are the Dirty Dozen tax scams for 2013:
1. Identity Theft
Use of someone’s name, Social Security number or other identifying information, without his or her permission, to commit fraud or other crimes tops this year’s Dirty Dozen list. Often, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.
The IRS said that last year it prevented the issuance of $20 billion of fraudulent refunds, including those related to identity theft, compared with $14 billion in 2011.
In January, the IRS conducted a coast-to-coast enforcement sweep against identity theft suspects that led to 734 enforcement actions. It currently has 3,000 people working on identity-theft-related cases and has trained 35,000 employees who work with taxpayers to help with identity theft situations.
The agency has a special section on IRS.gov dedicated to identity theft issues. It said taxpayers who believe they are at risk of identity theft because of lost or stolen personal information should contact the IRS immediately at 1-800-908-4490 so the agency can secure their tax account.
The IRS says it doesn’t initiate contact with taxpayers by email to request personal or financial information. That doesn’t stop scammers from phishing for taxpayer information so they can steal their money or identities.
Phishing is typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to entice potential victims and prompt them to provide valuable personal and financial information.
The agency said anyone who receives an unsolicited email that appears to be from either the IRS or a closely linked organization, such as the Electronic Federal Tax Payment System, should report it to firstname.lastname@example.org.
3. Return Preparer Fraud
Most return preparers provide honest service to their clients, but some unscrupulous preparers take advantage of unsuspecting taxpayers, and the result can be refund fraud or identity theft. These scammers have a large pool of potential victims to prey on, as about 60% of taxpayers will use tax professionals this year to prepare their tax returns.
The IRS reminded taxpayers that they are legally responsible for what’s on their tax return even if it’s prepared by someone else. They should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers.
The IRS offers tips about choosing a preparer, red flags, details on preparer qualifications and information on how and when to make a complaint on www.irs.gov/chooseataxpro.
4. Hiding Income Offshore
No one likes to pay taxes, but some people go a long way—literally—to avoid doing so. Over the years, the IRS has identified numerous individuals 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 is not amused, and aggressively pursues taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. It works closely with the Justice Department to prosecute tax evasion cases.
Legitimate reasons exist for maintaining financial accounts abroad, but reporting requirements need to be fulfilled, the agency said. U.S. taxpayers who maintain such accounts and fail to 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, the IRS has given errant taxpayers special opportunities to comply with the tax system and resolve their tax obligations. It has collected $5.5 billion from 38,000 individuals who have come forward voluntarily to disclose their foreign financial accounts.
5. ‘Free Money’ from the IRS & Tax Scams Involving Social Security
Old folks make easy prey. Ask any mugger lurking in an apartment house doorway. Recently, flyers and advertisements for free money from the IRS have been appearing in community churches around the country, suggesting that the taxpayer can file a return with little or no documentation. Scammers build false hopes and charge the elderly, as well as members of church congregations and people who have little or no income and normally don’t have a tax filing requirement, good money for bad advice. They encourage taxpayers to make fictitious claims for refunds or rebates based on false statements of entitlement to tax credits. Intentional mistakes of this kind can result in a $5,000 penalty, the IRS warned.
Some promoters claim they can obtain for their victims—often senior citizens—a tax refund or nonexistent stimulus payment based on the American Opportunity Tax Credit, even if the victim is not enrolled in or paying for college, or went to school decades ago. In the end, the victims discover their claims are rejected. Meanwhile, the promoters are long gone.
Some tax scams involve Social Security. The IRS said fraudsters have been known to lure the unsuspecting with promises of nonexistent 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.
6. Impersonation of Charitable Organizations
It’s depressingly common for scam artists to show up in the wake of a major natural disaster, impersonating charities to get money or private information from well-intentioned taxpayers. Their tactics vary. Some scammers operating bogus charities contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.
Others try to get personal financial information or Social Security numbers they can use to steal the victims’ identities or financial resources. Bogus websites solicit funds for disaster victims.
The IRS cautioned both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips:
- To help disaster victims, donate to recognized charities
- Be wary of charities with names that are similar to familiar or nationally known organizations. On the IRS website, Exempt Organizations Select Check allows people to search for legitimate, qualified charities to which donations may be tax-deductible
- Don’t give out personal financial information to anyone who solicits a contribution from you, as it could be used to steal your identity and money
- Don’t give or send cash. Contribute by check, credit card or another way that provides documentation of the gift for security and tax record purposes
- The IRS’s toll-free disaster assistance telephone number (1-866-562-5227) can answer a disaster victim’s specific questions about tax relief or disaster-related tax issues
7. False Form 1099 Refund Claims
Gullible taxpayers can wind up in a lot of trouble by listening to people who encourage them to claim deductions or credits to which they aren’t entitled, or willingly allow others to use their information to file false returns. They could be liable for financial penalties or face criminal prosecution.
Here’s one ongoing scam—and, astonishingly, some people fall for it. Individuals make 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-Original Issue Discount forms to the IRS. The perpetrator files a fake information return, such as a Form 1099-OID, to justify a false refund claim on a corresponding tax return.
8. False/Inflated Income and Expenses
Some folks will do just about anything to get a little extra credit. Take scammers who claim wages or self-employment income they never earned in order to boost refundable credits, such as the Earned Income Tax Credit. The IRS warns that filing false claims could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.
Other taxpayers file excessive claims for the fuel tax credit for which they are not eligible; they aren’t farmers, for example. The IRS considers fraud involving the fuel tax credit a frivolous tax claim, which can result in a penalty of $5,000.
9. Falsely Claiming Zero Wages
Another filing that could result in a $5,000 penalty is the use of a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 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. Filing a phony information return is illegal.
Bolder fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages. Or they may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation.
10. Frivolous Arguments
Certain promoters encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe—for example, that the income tax is unconstitutional. The IRS says these arguments are false and have been thrown out of court. It provides a list of frivolous tax arguments that taxpayers should avoid, at the same time acknowledging that taxpayers have the right to contest their tax liabilities in court.
11. Disguised Corporate Ownership
Fraudsters use third parties to improperly request employer identification numbers and form corporations that obfuscate the business’ true ownership. They then use these entities to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering and financial crimes.
The IRS said it was working with state authorities to identify these entities and bring the owners into compliance with the law.
12. Misuse of Trusts
Trusts are a time-honored tool for tax and estate planning. However, unscrupulous promoters have long urged taxpayers to transfer assets into trusts in some highly questionable transactions that promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. The IRS said its personnel had seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses.
It said such trusts rarely delivered the tax benefits promised. They are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.
——More Top 10 lists from AdvisorOne: