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Regulation and Compliance > Federal Regulation > IRS

IRS’s Top 12 Tax Scams for 2016: The ‘Dirty Dozen’

By Michael S. Fischer

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Almost as certain as death and taxes is the perennial appearance during tax season of scammers and evaders.

Con artists steal personal information, gull the elderly and promote schemes to the unsophisticated to avoid taxes or increase refunds. Some venal taxpayers don’t need help, and instead finagle their returns to win undeserved benefits or lower liabilities.

Every year, the Internal Revenue Service issues a “dirty dozen” list of a variety of common scams that taxpayers may encounter anytime but especially during filing season as people prepare their returns or hire people to help with their taxes.

The agency notes that illegal scams can result in significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice to shut down scams and prosecute the criminals behind them.

The agency also offers a variety of ways to obtain tax information.

Following are this year’s “dirty dozen” as prepared by the IRS:

Identity Theft

1. Identity Theft

Tax-related identity theft, in which someone uses a stolen Social Security number to file a tax return claiming a fraudulent refund, remains a chief concern for the IRS.

And with good reason. A recent study found that some two-thirds of taxpayers thought identity theft “could never happen to me,” often making them easy prey for scammers.

In fiscal 2015, the IRS initiated 776 identity-theft-related investigations, resulting in 774 sentencings through its enforcement efforts.

“We urge people to use caution when viewing emails, receiving telephone calls or getting advice on tax issues because scams can take on many sophisticated forms,” IRS commissioner John Koskinen said.

“Keep your personal information secure by protecting your computers and only giving out your Social Security numbers when absolutely necessary.”

Phone Scams

2. Phone Scams

Criminals impersonating IRS agents have deluged taxpayers across the nation with phone calls, threatening police arrest, deportation, license revocation and other things.

“There are many variations,” Koskinen said. “The caller may threaten you with arrest or court action to trick you into making a payment. Some schemes may say you’re entitled to a huge refund. These all add up to trouble.”

The IRS reminded taxpayers it would never do the following:

  • Call to demand immediate payment, or call about taxes owed without first having mailed a bill
  • Demand payment without first giving the taxpayer an opportunity to question or appeal the amount said to be owed
  • Require a taxpayer to use a specific payment method for your taxes, such as a prepaid debit card
  • Ask for credit or debit card numbers over the phone
  • Threaten arrest for nonpayment

Following is what a taxpayer who gets a phone call from someone claiming to be from the IRS and asking for money should do.

If you don’t owe taxes, or have no reason to think that you do:

  • Do not give out any information. Hang up immediately.
  • Contact the Treasury Inspector General for Tax Administration to report the call. Use their “IRS Impersonation Scam Reporting” web page. You can also call 800-366-4484.
  • Report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add “IRS Telephone Scam” in the notes.

If you know you owe, or think you may owe tax:

  • Call the IRS at 800-829-1040. IRS workers can help you.

Phishing 

3. Phishing

“Criminals are constantly looking for new ways to trick you out of your personal financial information, so be extremely cautious about opening strange emails,” Koskinen said.

Some scammers pose as a person or organization the victim trusts or recognizes. Others hack an email account, and send mass emails under another person’s name.  Still others pose as a bank, credit card company, tax software provider or government agency.

Criminals create websites that appear legitimate but contain phony login pages in the hope victims will take the bait and provide money, passwords, Social Security number and identity.

“The IRS won’t send you an email about a tax bill or refund out of the blue,” Koskinen said. “We urge taxpayers not to click on any unexpected emails claiming to be from the IRS.”

Doing so can expose the target’s computer to malware, enabling the criminal to access sensitive files or track keyboard strokes, exposing login information.

Return Preparer Fraud 

4. Return Preparer Fraud

Although most tax professionals provide honest, high-quality service, some dishonest preparers set up shop each filing season to perpetrate refund fraud, identity theft and other scams that hurt taxpayers.

“Choose your tax return preparer carefully because you entrust them with your private financial information that needs to be protected,” Koskinen said. 

The IRS offers these tips for choosing a tax preparer:

  • Ask whether the preparer has an IRS Preparer Tax Identification Number, which is required to register with the IRS and must be included on the filed tax return
  • Does the tax return preparer have a professional credential, belong to a professional organization or attend continuing education classes?
  • Check the preparer’s qualifications on the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications
  • Ask the Better Business Bureau about the preparer. For CPAs, check with the State Board of Accountancy; for attorneys, the State Bar Association; for enrolled agents, IRS.gov
  • Ask about service fees, and keep in mind preparers are not allowed to base fees on a percentage of their client’s refund. And make sure that your refund goes directly to you, not into the preparer’s bank account
  • Make sure the preparer offers IRS e-file — the safest and most accurate way to file a return
  • Good preparers ask to see records and receipts, and ask questions to determine total income, deductions, tax credits and other items. Do not rely on a preparer who is willing to e-file a return using your last pay stub instead of your Form W-2, as this is against IRS e-file rules
  • Make sure the preparer is available in the event questions come up about the tax return. Avoid fly-by-night preparers
  • Understand who can represent you. Attorneys, CPAs and enrolled agents can represent any client before the IRS in any situation, while non-credentialed tax return preparers can do so only in limited situations
  • Never sign a blank return
  • Review the return before signing
  • Report tax preparer misconduct to the IRS

Offshore Tax Avoidance

5. Offshore Tax Avoidance

The IRS said that despite several years of budget reductions, it has continued to pursue cases of offshore tax evasion in all parts of the world, regardless of whether the person hiding money overseas chooses a bank with no offices on U.S. soil. It said taxpayers were best served by coming in voluntarily and taking care of their tax-filing responsibilities.

The IRS offers the Offshore Voluntary Disclosure Program to enable people catch up on their filing and tax obligations. Since the first OVDP opened in 2009, there have been more than 54,000 disclosures, and the agency has collected more than $8 billion from this initiative alone. The agency has conducted thousands of offshore-related civil audits that have produced tens of millions of dollars, and has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.

It noted that the recent string of successful enforcement actions against offshore tax cheats and the financial organizations that abet them shows that it is a bad bet to hide money and income offshore.

Inflated Refund Claims

6. Inflated Refund Claims

“Be wary of tax preparers that tout outlandish refunds based on federal benefits or tax credits you’ve never heard of or weren’t eligible to claim in the past,” Koskinen said. “Taxpayers should choose preparers who file accurate returns.”

Scam artists use flyers, advertisements, phony store fronts and word of mouth to throw out a wide net for victims. They frequently prey on people who do not have a filing requirement, such as low-income individuals or the elderly, as well as on non-English speakers, who may or may not have a filing requirement.

Some scammers build false hope by duping people into making claims for fictitious rebates, benefits or tax credits. They charge good money for very bad advice. Or they file a false return in a person’s name without that person knowing that a refund was paid.

Scam artists 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 education credits, the Earned Income Tax Credit or the American Opportunity Tax Credit, among others.

The IRS said it sometimes hears about scams from victims who have lost their federal benefits, such as Social Security benefits, certain veteran’s benefits or low-income housing benefits because of bogus claims filed with the IRS that provided false income amounts.

Fake Charities

7. Fake Charities

The IRS said charitably inclined Americans should be wary of nonprofits with names that are similar to familiar or nationally known, legitimate organizations. The agency’s Exempt Organizations Select Check allows donors to find legitimate, qualified charities to which contributions may be tax deductible.

Legitimate charities will provide their Employer Identification Numbers, if requested, which can be used to verify their legitimacy through EO Select Check. It is advisable to double check using a charity’s EIN, the IRS said.

Donors should not give or send cash. For security and tax record purposes, they should contribute only by check or credit card or another way that provides documentation of the gift.

Another long-standing type of abuse or fraud involves scams that occur in the wake of significant natural disasters. To help disaster victims, the IRS encourages taxpayers to donate to recognized charities.

Falsely Padding Deductions on Returns

8. Falsely Padding Deductions on Returns

Each year, some taxpayers just can’t resist the temptation to fudge information on their tax returns by falsely inflating deductions or expenses to underpay what they owe and possibly receive larger refunds.

“Taxpayers should file accurate returns to receive the refunds they are entitled to receive and shouldn’t gamble with their taxes by padding their deductions,” Koskinen said.

The IRS said it normally is able to audit returns filed within the last three years, and additional years can be added if substantial errors are identified or fraud is suspected.

Significant civil penalties may apply for taxpayers who file incorrect tax returns, and taxpayers could be subject to criminal prosecution possibly leading to additional penalties and even prison time.

The IRS said using tax software was one of the best ways for taxpayers to ensure they file an accurate return and claim only the tax benefits they’re eligible to receive. One option is IRS Free File.

Excessive Claims for Business Credits

9. Excessive Claims for Business Credits

The fuel tax credit generally is not available to most taxpayers, yet the IRS said it routinely uncovered unscrupulous preparers who had enticed sizable groups of taxpayers to erroneously claim the credit to inflate their refunds.

Improper claims for the fuel tax credit generally come in two forms: an individual or business making an erroneous claim on an otherwise legitimate tax return, or an identity thief claiming the credit in a broader fraudulent scheme.

The IRS also sees a lot of misuse of the research credit, a feature of the tax code intended to foster research and experimentation by the private sector. It said improper claims generally involve failures to participate in or substantiate qualified research activities or satisfy the requirements related to qualified research expenses. As well, improper expenses may be contained in some claims for the research credit.

To claim a research credit, the IRS said, taxpayers must evaluate and appropriately document their research activities over a period of time to establish the amount of qualified research expenses paid for each qualified research activity. Unsupported claims for the research credit may subject taxpayers to penalties. The agency said taxpayers should carefully review reports or studies prepared by third parties to ensure they accurately reflect the taxpayer’s activities.

Falsifying Income to Claim Credits

10. Falsifying Income to Claim Credits

Some people inflate or include income on a tax return they never earned, either as wages or as self-employment income, usually in order to maximize refundable credits, such as the Earned Income Tax Credit.

“Misrepresenting facts is cheating and taxpayers are legally responsible for all the information reported on their tax returns,” Koskinen said.

Falsifying income could result in the taxpayer facing a big bill to repay the erroneous refunds, or in some cases, criminal prosecution.

The IRS said taxpayers may encounter unscrupulous return preparers who make them aware of this scam. They should keep in mind that they are legally responsible for what is on their tax return even if it is prepared by someone else.

Abusive Tax Shelters

11. Abusive Tax Shelters

According to the IRS, abusive tax schemes have evolved from structuring of improper domestic and foreign trust arrangements into sophisticated strategies that take advantage of certain foreign jurisdictions’ financial secrecy laws and the availability of credit/debit cards issued from offshore financial institutions.

“These schemes can end up costing taxpayers more in back taxes, penalties and interest than they saved in the first place,” Koskinen said.

The IRS said taxpayers should be aware that an arrangement is an abusive scheme if it uses unnecessary steps or a form that does not match its substance. Taxpayers should also remember that promoters of these schemes often use financial instruments improperly to facilitate tax evasion.

Trusts also commonly show up in abusive tax structures, promising reduced taxable income, inflated deductions for personal expenses, reduced (or zero) self-employment taxes and reduced estate or gift transfer taxes.

The IRS said such transactions commonly appear when taxpayers are transferring wealth from one generation to another. Questionable trusts rarely deliver the tax benefits promised, it said, and are used mainly as a way to avoid income tax liability and hide assets from creditors, including the IRS.

Taxpayers, it said, should seek the advice of a trusted professional before entering a trust arrangement.

Last year, The Treasury Department and IRS issued guidance on Wednesday to effectively halt the use of so-called “basket options,” a tax loophole that high-net-worth investors use when investing in alternatives.

Frivolous Tax Arguments

12. Frivolous Tax Arguments

Promoters of frivolous arguments encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe, such as contending that taxpayers can refuse to pay taxes on religious or moral grounds by invoking the First Amendment. They also include contentions that the only “employees” subject to federal income tax are employees of the federal government; and that only foreign-source income is taxable.

Taxpayers have the right to contest their tax liabilities in court, the IRS noted, but using frivolous arguments is wrong, and these have been thrown out of court.

The penalty for filing a frivolous tax return is $5,000. Taxpayers who rely on frivolous arguments and schemes may also face criminal prosecution. Persons who promote frivolous arguments and those who assist taxpayers in claiming tax benefits based on frivolous arguments may be prosecuted for a felony.

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