The spring tax season is a fraught period for U.S. taxpayers. It’s also a lucrative one for scam artists who prey on both unwary victims and complicit tax evaders.
“These schemes jump every year at tax time,” IRS commissioner John Koskinen said recently on the release of the agency’s “Dirty Dozen” list of tax scams that can take many different forms, some quite sophisticated.
Scams, which taxpayers may encounter throughout the year, can lead to significant penalties and interest and possible criminal prosecution, the IRS warned in a statement.
“We urge people to protect themselves and use caution when viewing emails, receiving telephone calls or getting advice on tax issues,” Koskinen said
Following are the 2014 Dirty Dozen Tax Scams.
1. Identity Theft
Unauthorized use of someone’s personal information to commit fraud or other crimes remains the IRS’s top concern this tax season. In many cases, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.
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 can call the IRS Identity Protection Specialized Unit at 1-800-908-4490.
2. Pervasive Telephone Scams
Calls from scammers pretending to be IRS representatives in hopes of stealing money or identities from victims are increasing across the country, according to the agency. Callers may tell victims they owe money or are entitled to a big refund. They may threaten arrest, driver’s license revocation or, in the case of recent immigrants, deportation. Follow-up calls may come from people saying they are from the local police department or the state motor vehicle department.
The IRS said these scams are characterized by the following:
- Callers generally identify themselves with fake common names and surnames and provide false IRS badge numbers.
- Scammers may be able to recite the last four digits of a victim’s Social Security Number.
- They imitate the IRS toll-free number on caller ID to make it appear that the IRS is calling.
- Scammers sometimes send bogus IRS emails to victims to support their calls.
- Victims hear background noise of other calls being conducted to mimic a call site.
The IRS said recipients of calls from suspected scammers can call the agency at 1-800-829-1040 if they know or think they owe taxes and receive help with a payment issue—if there really is an issue.
Those who have no reason to think they owe taxes can report the incident to the Treasury Inspector General for Tax Administration at 1-800-366-4484.
Some scammers like to “phish,” using unsolicited email or a fake website to lure in potential victims and prompt them to provide valuable personal and financial information. They can then commit identity theft or financial theft.
The IRS noted that it did not initiate contact with taxpayers by any type of electronic communication to request personal or financial information.
Recipients of 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, should forward the message to firstname.lastname@example.org.
4. False Promises of ‘Free Money’ from Inflated Refunds
Scam artists routinely pose as tax preparers during tax time, promising large federal tax refunds or refunds people never thought they were due. They prey on people who do not have a filing requirement, such as low-income individuals or the elderly. Non-English speakers, who may or may not have a filing requirement, are favored targets.
Scammers dupe people into making claims for fictitious rebates, benefits or tax credits. Sometimes, they file a false return in a person’s name, and that person never knows that a refund was paid. They also victimize people with a filing requirement and due a refund by promising inflated refunds based on fictitious Social Security benefits and false claims for various credits.
The IRS said taxpayers who buy into such schemes can end up being penalized for filing false claims or receiving fraudulent refunds.
Victims sometimes lose benefits because of false claims being filed with the IRS that provided false income amounts. Frequently they are not given a copy of what was filed. And when the fraudulent refund is deposited into the scammer’s bank account, the con artist deducts a large “fee” before cutting a check to the victim—legitimate practitioners do not use this practice, the IRS said.
5. Return Preparer Fraud
Taxpayers are legally responsible for what is on their tax return even if it is prepared by someone else. For the 60% of taxpayers who the IRS said will use tax professionals this year, it is important to choose carefully when hiring an individual or firm to prepare a return.
Some unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft. The agency said taxpayers should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers.
Details on preparer qualifications and information on how and when to make a complaint are available at www.irs.gov/chooseataxpro.
6. Hiding Income Offshore
U.S. taxpayers who maintain financial accounts abroad must fulfill reporting requirements. Over the years, however, the IRS has identified numerous individuals 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.
The IRS pursues taxpayers with undeclared accounts, as well as the banks and bankers it suspects of helping clients hide their assets overseas. And the agency works with the Department of Justice to prosecute tax evasion cases. New foreign account reporting requirements being phased in over the next few years will make hiding income offshore increasingly difficult.
At the beginning of 2012, the IRS reopened for an indefinite period its Offshore Voluntary Disclosure Program following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The agency has collected billions of dollars in back taxes, interest and penalties so far from people who participated in the voluntary programs since 2009.
7. Impersonation of Charitable Organizations
Big natural disasters elicit powerful responses from charities and donors. Scam artists usually show up too, commonly impersonating charities to get money or private information from well-intentioned taxpayers. Some operators of bogus charities contact people by telephone or email to solicit money or financial information, or set up websites to solicit funds for disaster victims.
Sometimes, scammers 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. They may try to obtain personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources.
The IRS cautions 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 ones, but are phony organizations. IRS.gov’s Exempt Organizations Select Check allows donors find legitimate, qualified charities to which contributions may be tax-deductible.
- Don’t give out personal financial information to anyone who solicits a contribution as this information could be used to steal your identity and money.
- Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.
8. False Income, Expenses or Exemptions
Inflating or including either wages or self-employment income on a tax return that was never earned in order to maximize refundable credits could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution, the IRS said.
Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. But ineligible individuals have also claimed this tax credit. The IRS said fraud involving the fuel tax credit is considered a frivolous tax claim, and can result in a penalty of $5,000.
9. Frivolous Arguments
Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. Such arguments are wrong and have been thrown out of court, according to the IRS. Those who promote or adopt frivolous positions could be responsible for an accuracy-related penalty, a civil fraud penalty, an erroneous refund claim penalty or a failure to file penalty. The Tax Court may also impose a penalty against taxpayers who make frivolous arguments in court.
Taxpayers who rely on frivolous arguments and schemes may also face criminal prosecution for attempting to evade or defeat tax. Persons who promote frivolous arguments and those who assist taxpayers in claiming tax benefits based on frivolous arguments may be prosecuted for a criminal felony.
10. Falsely Claiming Zero Wages
The IRS warned taxpayers not to fall prey to people who encourage them to claim deductions or credits to which they are not entitled, or willingly allow others to use their information to file false returns. Parties to such schemes could be liable for financial penalties or even face criminal prosecution.
One scheme involves filing a phony information return in order to lower the amount of taxes an individual owes. A Form 4852 (Substitute Form W-2) 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. Filing this type of return may result in a $5,000 penalty.
Another fraudulent scheme involves use of false Form 1099 refund claims. For instance, individuals may claim a refund 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 Form 1099-OID to justify a false refund claim on a corresponding tax return.
11. Abusive Tax Structures
Abusive tax schemes have evolved 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 IRS said it was on the case. Its Criminal Investigation program identifies and investigates promoters of abusive tax structures and those who aid and abet them. Equally important, it investigates investors who knowingly participate in such schemes.
Abusive schemes encompass violations of the Internal Revenue Code and related statutes where multiple flow-through entities are used as an integral part of the taxpayer’s effort to evade taxes. The IRS said these schemes were usually complex, involving multi-layer transactions for the purpose of concealing the true nature and ownership of the taxable income and/or assets.
The agency cautioned that form over substance are the most important words to remember before buying into any arrangements that promise to “eliminate” or “substantially reduce” a tax liability. It said promoters of abusive tax schemes often use financial instruments in their schemes. However, the instruments are used for improper purposes including the facilitation of tax evasion.
12. Misuse of Trusts
Trusts are essential estate planning tools, but the IRS often sees highly questionable transactions. It said unscrupulous promoters urged taxpayers to transfer large amounts of assets into trusts, including not only cash and investments, but also successful on-going businesses. 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. Such transactions commonly arise when taxpayers are transferring wealth from one generation to another.
The agency said questionable trusts rarely delivered the tax benefits promised, and were used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.
– Check out these related stories on ThinkAdvisor:
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For more tax planning advice, check out ThinkAdvisor’s 21 Days of Tax Planning Advice for 2014 home page.