On Thursday, the Internal Revenue Service (IRS) issued its annual list of the “Dirty Dozen” tax scams it has seen this tax season.
“The Dirty Dozen represents the worst of the worst tax scams,” IRS Commissioner Doug Shulman said in a statement. “Don’t fall prey to these tax scams. They may look tempting, but these fraudulent deals end up hurting people who participate in them.”
The IRS works with the Justice Department to prosecute the perpetrators of illegal scams, who frequently face heavy fines and imprisonment. Taxpayers who intentionally or unintentionally get involved in such schemes must repay all taxes due plus interest and penalties.
The “Dirty Dozen” is comprised of:
Hiding income offshore
Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks and brokerage accounts or using offshore debit cards, credit cards or other options. In early February, the IRS announced a voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system.
Identity theft and phishing
Identity thieves use an unsuspecting individual’s name, Social Security number, credit card number or other personal information without permission to commit fraud or other crimes. Perpetrators often use information to run up bills on victims’ credit cards, empty their bank accounts or take out loans in their name. Some identity thieves even file fraudulent tax returns in their victims’ names and collect refunds.
Phishing is a tactic used by scam artists to trick victims into revealing personal or financial information online, often involving the use of phony e-mail, websites and social media. IRS impersonation schemes are common during tax season.
Return preparer fraud
Dishonest return preparers skim a portion of their clients’ refunds, charge inflated fees for services and attract new clients with false promises. Federal courts have issued hundreds of injunctions ordering individuals to cease preparing returns, while the Department of Justice has pending complaints against dozens of others.
Filing false or misleading forms
Scam artists file false or misleading returns to claim refunds to which they are not entitled. One scheme involves a taxpayer who seeks a refund by fabricating a return and falsely claiming the corresponding amount as withholding. Often, scammers use phony information returns to legitimize erroneous refund claims.
Promoters of tax schemes encourage people to make outlandish claims to avoid paying taxes. The IRS has released a list of frivolous legal positions that taxpayers should avoid, which have been thrown out of court.
Nontaxable Social Security benefits with exaggerated withholding credit
The IRS has identified returns where Taxpayers report nontaxable Social Security benefits with excessive withholding, which results in no income reported to the agency on the return. Filings of this type of return may result in a penalty of up to $5,000.
Abuse of charitable organizations and deductions
The misuse of tax-exempt organizations includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property. Another scheme involves the donation of non-cash assets where several organizations claim the full value for both the receipt and distribution of the same contribution.
Abusive retirement plans
The IRS seeks to identify abuses in retirement plan arrangements, such as transactions that taxpayers use to avoid the limits on contributions to individual retirement accounts (IRA) and transactions that are not properly reported as early distributions. Taxpayers should avoid shifting appreciated assets at less than market value into IRAs or companies owned by their IRAs to avoid annual contribution limits.
Disguised corporate ownership
Corporations and other entities are formed and operated in certain states for the purpose of disguising the ownership of the business or financial activity. Such entities can be used to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering and other financial crimes.
The filing of a phony wage- or income-related return to replace a legitimate return is used to lower the amount of taxes owed. Often, a Form 4852 or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. Taxpayers may also submit a statement rebutting wages and taxes reported by a payer. Another version of this scheme involves including an explanation on Form 4852 that cites statutory language on the definition of wages.
Misuse of trusts
While there are many legitimate uses of trusts in tax and estate planning, some questionable transactions promise reduction of income subject to tax, deductions for personal expenses or and reduced estate or gift taxes. Such trusts are used primarily as a means to avoid income tax liability and hide assets from creditors. Recently, private annuity trusts and foreign trusts have become popular vehicles for this scheme.
Fuel tax credit scams
Some taxpayers may be eligible for the fuel tax credit, but others are claiming the credit for nontaxable uses of fuel when their occupations or income levels make the claim unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim.