Article
The "Dirty Dozen" of Tax Scams
Author(s):
Although you can fall victim to a tax scam at any point during the year, taxpayers should be especially cautious during filing season, when most schemes peak.
Although you can fall victim to a tax scam at any point during the year, taxpayers should be especially cautious during filing season, when most schemes peak.
Each year the Internal Revenue Service (IRS) releases its list of the “Dirty Dozen” tax scams taxpayers should protect against. The schemes on this list range from common identity theft to return preparer fraud.
"This tax season, the IRS has stepped up its efforts to protect taxpayers from a wide range of schemes, including moving aggressively to combat identity theft and refund fraud," IRS Acting Commissioner Steven T. Miller, said in a statement. "The Dirty Dozen list shows that scams come in many forms during filing season. Don't let a scam artist steal from you or talk you into doing something you will regret later."
In some of the following scams the taxpayer has fallen victim to unscrupulous individuals, while in others, the taxpayers are running the scheme. Here are the IRS’ “dirty dozen” tax scams and how to avoid falling victim (when applicable).
Plus, below, you'll find a handy infographic from H&R Block.
12. Misuse of Trusts
What happens: Questionable transactions promoted by unscrupulous individuals that rarely deliver on the promises of deductions for personal expenses or to reduce income subject to tax and estate or gift taxes. Primarily these trusts are used as a means of avoiding tax liability or hiding assets.
What to do: There are plenty of legitimate uses of trusts in tax and estate planning that won’t draw the attention of the IRS. Make sure you aren’t being led astray in a way that will come back to haunt you by seeking advice from a trusted professional.
11. Disguised Corporate Ownership
What happens: Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business. They help dishonest individuals underreport income, claim fake deductions and avoid filing tax returns. They also facilitate money laundering and other financial crimes.
10. Falsely Claiming Zero Wages
What happens: Filing a form to reduce taxable income to zero when it isn’t applicable. Perpetrators can be subject to a $5,000 penalty.
9. Frivolous Arguments
What happens: Taxpayers are encouraged to make outlandish claims to avoid paying taxes owed.
What to do: Check this list of what to avoid. These arguments have all been thrown out of court.
8. False Form 1099 Refund Claims
What happens: There is a theory that taxpayers can gain access to secret accounts by issuing 1099-OID forms. The perpetrator files a fake return to justify a false refund claim.
What to do: Don’t allow people to use your information to file false returns; you could be liable for financial penalties or face criminal prosecution.
7. False/Inflated Income and Expenses
What happens: A popular scam is to claim income you did not earn or expenses you did not pay.
What to do: Avoid frivolous claims or reporting inflated income. Taxpayers will have to repay the refunds, including interest and penalties, and, in some cases, this could result in prosecution.
6. Impersonation of Charitable Organizations
What happens: In the wake of significant natural disasters, scam artists will impersonate charities to get money or private information.
What to do: Do careful due diligence:
• Donate to recognized charities.
• Be wary of charities with names similar to, but slightly different, from nationally known organizations.
• Don’t give out Social Security numbers, or credit card and bank account numbers and passwords.
• No cash — for security and tax record purposes contribute by check or credit card.
5. “Free Money” from the IRS & Tax Scams Involving Social Security
What happens: Advertisements promising refunds to people who have little or no income and normally don’t have a tax filing requirement. According to the IRS, flyers have been showing up in community churches and the information is then spread word of mouth by well-intentioned people.
What to do: If you are paying someone before you receive the refund or before you find out if the claim is rejected, then be sure to do a background check. Often, these scammers will charge good money for bad advice and will be long gone by the time taxpayers find out their claims were rejected.
4. Hiding Income Offshore
What happens: As a form of tax evasion, individuals have been using offshore accounts for years to hide income.
What to do: This doesn’t mean you can’t use offshore accounts — there are perfectly legitimate and legal ways to utilize them. Failure to fulfill reporting requirements means penalties or criminal prosecution. At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program for individuals to come forward to disclose their foreign financial accounts and resolve their tax obligations.
3. Return Preparer Fraud
What happens: Approximately 60% of taxpayers use tax professionals to prepare their tax returns; unfortunately, there are some preparers who prey on people, resulting in refund fraud or identity theft.
What to do: Carefully choose who prepares your return and don’t be afraid to verify the person’s credentials with the appropriate organizations. Furthermore, you should only use a preparer who signs the return and enters his or her IRS Preparer Tax Identification Number.
2. Phishing
What happens: A phishing scam is typically carried out through unsolicited emails and fake websites posing as legitimate sites. Victims then provide personal information.
What to do: The IRS does not initiate contact via email, text or social media to request personal or financial information, so you should be wary of any contact like this and the sites they direct you to.
1. Identity Theft
What happens: Someone uses your personal information, such as Social Security number, to commit fraud or other crimes. The thief will file a fraudulent tax return and claim your refund.
What to do: Protect your information with strong passwords, be able to identify thieves or IRS impersonators and contact the IRS immediately if you think you are at risk so you can avoid penalties and fines.
