Each year the IRS puts together a list of the tax scams that are most pervasive to taxpayers, which they refer to as the “Dirty Dozen”. There has only been a couple of changes to the list this year, most specifically the addition of “pervasive telephone scams”, introduced as #2 on the list this year, and combining “false Form 1099 claims” (on both 2012 & 2013’s list) with “falsely claiming zero wages”. Identity theft, which is a major issue in the tax return world, tops the list again this year after having first appeared on the list in 2013. I’ve included the rankings for each item for 2012 and 2013 within the 2014 list below, for your reference.
This list is from IRS’ Special Edition Tax Tip 2014-08.
Don’t Fall for the Dirty Dozen Tax Scams
Every year, people fall prey to tax scams. That’s why the IRS sends a list of its annual “Dirty Dozen”. We want you to be safe and informed – and not become a victim.
Taxpayers who get involved in illegal tax scams can lose their money, or face stiff penalties, interest and even criminal prosecution. Remember, if it sounds too good to be true, it probably is. Be on the lookout for these scams.
- Identity theft. (2013: #1; 2012: not on the list) Tax fraud using identity theft tops this year’s Dirty Dozen list. In many cases, and identity thief uses a taxpayer’s identity to illegally file a tax return and claim a refund. For the 2014 filing season, the IRS has expanded efforts to better protect taxpayers and help victims. Fide more information on the identity protection page on www.IRS.gov.
- Pervasive telephone scams. (2013: not on the list; 2012: not on the list) The IRS has seen an increase in local phone scams across the country. Callers pretend to be from the IRS in hopes of stealing money or identities from victims. If you get a call from someone claiming to be from the IRS – and you know you owe taxes or think you might owe taxes, call the IRS at 1-800-829-1040. If you get a call from someone claiming to be from the IRS and know you don’t owe taxes or have no reason to think that you owe taxes, then call and report the incident to the Treasury Inspector General for Tax Administration at 1-800-366-4484.
- Phishing. (2013: #2; 2012: #2) Phishing scams typically use unsolicited emails or fake websites that appear legitimate. Scammers lure in victims and prompt them to provide their personal and financial information. The fact is that 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.
- False promises of “free money” from inflated refunds. (2013: #5; 2012: #5) The bottom line is that you are legally responsible for what’s on your tax return, even if someone else prepares it. Scam artists often pose as tax preparers during tax time, luring victims in by promising large tax refunds. Taxpayers who buy into such schemes can end up penalized for filing false claims or receiving fraudulent refunds. Take care when choosing someone to do your taxes.
- Return preparer fraud. (2013: #3; 2012: #3) About 60 percent of taxpayers will use tax professionals this year to prepare their tax returns. Most return preparers provide honest service to their clients. But some dishonest preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft. Choose carefully when hiring an individual or a company to do your tax return. Only use a tax preparer that will sign your return and enter their IRS Preparer Tax Identification Number (PTIN). For tips about choosing a preparer, visit www.irs.gov/chooseataxpro.
- Hiding income offshore. (2013: #4; 2012: #4) While there are valid reasons for maintaining financial accounts abroad, there are reporting requirements. U.S. taxpayers who maintain such accounts and do not comply with these requirements are breaking the law. They risk large penalties and fines, as well as the possibility of criminal prosecution. The IRS has collected billions of dollars in back taxes, interest and penalties from people who participated in offshore voluntary disclosure programs since 2009. It is in the best interest of taxpayers to come forward and pay their fair share of taxes.
- Impersonation of charitable organizations. (2013: #6; 2012: #10) Taxpayers need to be sure they donate to recognized charities. Following major disasters, it’s common for scam artists to impersonate charities to get money or personal information from well-intentioned people. They may even directly contact disaster victims and claim to be working with the IRS to help the victims file casualty loss claims and get tax refunds.
- False income, expenses or exemptions. (2013: #7; 2012: #6) Falsely claiming income you did not earn or expenses you did not pay in order to get larger refundable tax credits is tax fraud. This includes false claims for the Earned Income Tax Credit. These taxpayers often end up repaying the refund, including penalties and interest for facing criminal prosecution.
- Frivolous arguments. (2013: #9; 2012: #8) 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 ignore their responsibility to pay taxes.
- Falsely claiming zero wages or using false Form 1099. (2013: #10 & #8; 2012: #9 & #7) Filing false information with the IRS is an illegal way to try to lower the amount of taxes owed. Typically, fraudsters use a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 as a way to improperly reduce taxable income to zero. The fraudster may also submit a false statement denying wages and taxes reported by a payer to the IRS.
- Abusive tax structures. (2013: #11; 2012: #11) These abusive tax schemes often involve sham business entities and dishonest financial arrangements for the purpose of evading taxes. The schemes are usually complex and involve multi-layer transactions to conceal the true nature and ownership of the taxable income and assets. The schemes often use Limited Liability Companies, Limited Liability Partnerships, International Business Companies, foreign financial accounts and offshore credit/debit cards.
- Misuse of trusts. (2013: #12; 2012: #12) There are reasonable uses of trusts in tax and estate planning. However, questionable transactions also exist. They may 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 trusts rarely deliver promised tax benefits. They primarily avoid taxes and hide assets from creditors, including the IRS.
Tax scams can take many forms beyond the “Dirty Dozen”. The best defense is to remain vigilant. Get more information on tax scams at www.IRS.gov.