The dirty dozen tax scams are compiled each year by the IRS to warn taxpayers of fraud or illegal schemes that arise during tax season. The IRS publishes the list to remind taxpayers to use caution to protect themselves against a wide range of schemes from identity theft to return preparer fraud. Taxpayers are ultimately responsible for all items on their tax return, so falling victim to a scam could lead to significant penalties or criminal prosecution. The following are the 12 most common illegal tax scams for 2014:
1. Identity theft – ID theft involves stealing personal information like your name, Social Security number (SSN) or other identifying information for the purpose of committing fraud or another crime. An identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.
2. Telephone scams – This popular tax-season scam involves callers falsely claiming to be IRS agents to obtain taxpayer payment through a pre-paid debit card or a wire transfer. Often times, the IRS phone number will appear on the caller-ID and scammers will have knowledge of the victim’s personal information such as the last four digits of their SSN in order to convince them to provide personal information.
3. Phishing – Phishing scams are typically carried out with the help of an unsolicited email and a fake website that prompts victims to enter personal or financial information. That information is then stolen and used to file false tax returns.
4. Inflated refund promises – Scammers offering inflated refund promises tell victims that they will receive large federal tax refunds in exchange for costly services. Some scams involve filing false tax returns in a victim’s name and others involve the scammer taking huge cuts of the government-issued tax refund in exchange for bad advice.
5. Return preparer fraud – Return preparer fraud involves tax preparers filing fraudulent returns or committing identity theft with a victim’s personal information. Although the victim chose to hire a tax preparer, the taxpayer is still legally responsible for the information on his or her return and can be held accountable in the event of fraud.
6. Hiding income offshore –These schemes involve hiding income in a foreign trust, an offshore bank account, a private annuity or an insurance plan. While U.S. taxpayers can maintain accounts offshore, there are requirements for reporting that information to the IRS. Failing to comply with federal reporting requirements is considered tax evasion.
7. Impersonation of a charitable organization – Following a major disaster, scammers impersonating the IRS will contact taxpayers to obtain personal information, allegedly for the purpose of assisting with claims or obtaining tax refunds. Others will impersonate charities to obtain money or personal information to commit identity theft. To avoid fake charities, donate only to recognized groups, and don’t provide personal financial information to a charitable organization.
8. False income, expenses or exemptions – This scam involves inflating or including income that was never earned to maximize refundable credits issued by the IRS.
9. Frivolous arguments – Frivolous arguments are outrageous claims that taxpayers make to the IRS to avoid paying their taxes, such as “payment of federal income tax is voluntary.” Taxpayers who rely on frivolous arguments and schemes may also face criminal prosecution for attempting to evade or defeat tax. Although taxpayers have the right to contest tax liabilities in court, no one has the right to disobey the law. The IRS provides a list of frivolous arguments that taxpayers should avoid.
10. Falsely claiming zero wages or using a false form 1099 – Scammers will encourage taxpayers to lower the amount of taxes an individual owes by filing a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 to reduce taxable income to zero.
11. Abusive tax structures – This scam involves a structured domestic or foreign trust arrangement, a structure to exploit financial secrecy laws of a foreign jurisdiction or, or an abusive tax structure using multi-layer financial data to conceal ownership of taxable income.
12. Misuse of trusts – A component of abusive tax structures, in this scam, trusts are used by scammers to convince taxpayers to transfer assets, including cash, investments and businesses into trusts in exchange for reduced taxable income and inflated deductions.
These are some of the most common tax schemes encountered by taxpayers each year. Victims of tax scams may suffer financial loss and can be held accountable by the IRS for the false information they unknowingly provide. If you suspect you are a victim of a tax scam, contact the IRS to review your return information.
Louis Balbirer, CPA, is a director of tax services in Kaufman Rossin’s Fort Lauderdale office. Kaufman Rossin, one of the top CPA firms in the U.S., offers international, state and local tax services for individuals and businesses. Louis can be reached at email@example.com.