On February 16, the IRS published its list of top 12 “tax scams” for 2012 dubbed the “Dirty Dozen.” “Taxpayers should be careful and avoid falling into a trap with the Dirty Dozen,” said IRS Commissioner Doug Shulman. “Scam artists will tempt people in-person, on-line and by e-mail with misleading promises about lost refunds and free money. Don’t be fooled by these scams.” Below is the list:
1. Identity Theft
According to the agency, “the IRS is increasingly seeing identity thieves looking for ways to use a legitimate taxpayer’s identity and personal information to file a tax return and claim a fraudulent refund.”
According to the IRS, “if you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to email@example.com.”
3. Return Preparer Fraud
According to the IRS, unscrupulous return preparer are individuals who:
- Do not sign the return or place a Preparer Tax identification Number on it.
- Do not give you a copy of your tax return.
- Promise larger than normal tax refunds.
- Charge a percentage of the refund amount as preparation fee.
- Require you to split the refund to pay the preparation fee.
- Add forms to the return you have never filed before.
- Encourage you to place false information on your return, such as false income, expenses and/or credits.
4. Hiding Income Offshore
According to the report, the IRS uses information gained from past investigations to pursue taxpayers with undeclared offshore accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. In the report, it is noted that “while there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting and disclosure requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.”
5. “Free Money” from the IRS & Tax Scams Involving Social Security
The report warns taxpayer of flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation. There is a $5,000 penalty for intentional mistakes of this kind.
6. False/Inflated Income and Expenses
According to the report, certain individuals have been claiming income they did not earn or expenses they did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit. This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.
7. False Form 1099 Refund Claims
According to the IRS, in this scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return. In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS.
8. Frivolous Arguments
The IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are false and have been thrown out of court.
9. Falsely Claiming Zero Wages
According to the IRS, filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS. Filing this type of return may result in a $5,000 penalty.
10. Abuse of Charitable Organizations and Deductions
The IRS is investigating schemes that involve the donation of non-cash assets –– including situations in which several organizations claim the full value of the same non-cash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new standards for qualified appraisals.
11. Disguised Corporate Ownership
According to the IRS, third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business. These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering, and financial crimes.
12. Misuse of Trusts
According to the report “for years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are legitimate uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.”