WASHINGTON –– The Internal Revenue Service today issued its annual
“Dirty Dozen” ranking of tax scams, reminding taxpayers to use caution
during tax season to protect themselves against a wide range of schemes
ranging from identity theft to return preparer fraud.
The Dirty Dozen listing, compiled by the IRS each year, lists a
variety of common scams taxpayers can encounter at any point during the
year. But many of these schemes peak during filing season as people
prepare their tax returns.
“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.”
Illegal scams can lead to significant penalties and interest and
possible criminal prosecution. The IRS Criminal Investigation Division
works closely with the Department of Justice to shutdown scams and
prosecute the criminals behind them.
The following is the Dirty Dozen tax scams for 2012:
Identity Theft
Topping this year’s list Dirty Dozen list is identity theft. In
response to growing identity theft concerns, the IRS has embarked on a
comprehensive strategy that is focused on preventing, detecting and
resolving identity theft cases as soon as possible. In addition to the
law-enforcement crackdown, the IRS has stepped up its internal reviews
to spot false tax returns before tax refunds are issued as well as
working to help victims of the identity theft refund schemes.
Identity theft cases are among the most complex ones the IRS handles,
but the agency is committed to working with taxpayers who have become
victims of identity theft.
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.
An IRS notice informing a taxpayer that more than one return was filed
in the taxpayer’s name or that the taxpayer received wages from an
unknown employer may be the first tip off the individual receives that
he or she has been victimized.
The IRS has a robust screening process with measures in place to stop
fraudulent returns. While the IRS is continuing to address tax-related
identity theft aggressively, the agency is also seeing an increase in
identity crimes, including more complex schemes. In 2011, the IRS
protected more than $1.4 billion of taxpayer funds from getting into the
wrong hands due to identity theft.
In January, the IRS announced the results of a massive, national
sweep cracking down on suspected identity theft perpetrators as part of a
stepped-up effort against refund fraud and identity theft. Working
with the Justice Department’s Tax Division and local U.S. Attorneys’
offices, the nationwide effort targeted 105 people in 23 states.
Anyone who believes his or her personal information has been stolen
and used for tax purposes should immediately contact the IRS Identity
Protection Specialized Unit. For more information, visit the special
identity theft page at
www.IRS.gov/identitytheft.
Phishing
Phishing is a scam typically carried out with the help of unsolicited
email or a fake website that poses as a legitimate site to lure in
potential victims and prompt them to provide valuable personal and
financial information. Armed with this information, a criminal can
commit identity theft or financial theft.
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
phishing@irs.gov.
It is important to keep in mind 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. The IRS has information that can
help you
protect yourself from email scams.
Return Preparer Fraud
About 60 percent of taxpayers will use tax professionals this year to
prepare and file their tax returns. Most return preparers provide
honest service to their clients. But as in any other business, there are
also some who prey on unsuspecting taxpayers.
Questionable return preparers have been known to skim off their
clients’ refunds, charge inflated fees for return preparation services
and attract new clients by promising guaranteed or inflated refunds.
Taxpayers should choose carefully when hiring a tax preparer. Federal
courts have issued hundreds of injunctions ordering individuals to cease
preparing returns, and the Department of Justice has pending complaints
against many others.
In 2012, every paid preparer needs to have a Preparer Tax
Identification Number (PTIN) and enter it on the returns he or she
prepares.
Signals to watch for when you are dealing with an unscrupulous return preparer would include that they:
- 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.
For advice on how to find a competent tax professional, see
Tips for Choosing a Tax Preparer.
Hiding Income Offshore
Over the years, numerous individuals have been identified as evading
U.S. taxes by hiding income in offshore banks, brokerage accounts or
nominee entities, using debit cards, credit cards or wire transfers to
access the funds. Others have employed foreign trusts, employee-leasing
schemes, private annuities or insurance plans for the same purpose.
The IRS uses information gained from its investigations to pursue
taxpayers with undeclared accounts, as well as the banks and bankers
suspected of helping clients hide their assets overseas. The IRS works
closely with the Department of Justice to prosecute tax evasion cases.
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.
Since 2009, 30,000 individuals have
come forward voluntarily to disclose their
foreign financial accounts, taking advantage of special opportunities
to bring their money back into the U.S. tax system and resolve their tax
obligations. And, with new foreign account reporting requirements being
phased in over the next few years, hiding income offshore will become
increasingly more difficult.
At the beginning of this year, the IRS reopened the Offshore
Voluntary Disclosure Program (OVDP) following continued strong interest
from taxpayers and tax practitioners after the closure of the 2011 and
2009 programs. The IRS continues working on a wide range of
international tax issues and follows ongoing efforts with the Justice
Department to pursue criminal prosecution of international tax evasion.
This program will be open for an indefinite period until otherwise
announced.
The IRS has collected $3.4 billion so far from people who
participated in the 2009 offshore program, reflecting closures of about
95 percent of the cases from the 2009 program. On top of that, the IRS
has collected an additional $1 billion from up front payments required
under the 2011 program. That number will grow as the IRS processes the
2011 cases.
“Free Money” from the IRS & Tax Scams Involving Social Security
Flyers and advertisements for free money from the IRS, suggesting
that the taxpayer can file a tax return with little or no documentation,
have been appearing in community churches around the country. These
schemes are also often spread by word of mouth as unsuspecting and
well-intentioned people tell their friends and relatives.
Scammers prey on low income individuals and the elderly. They build
false hopes and charge people good money for bad advice. In the end, the
victims discover their claims are rejected. Meanwhile, the promoters
are long gone. The IRS warns all taxpayers to remain vigilant.
There are a number of tax scams involving Social Security. For
example, scammers have been known to lure the unsuspecting with promises
of non-existent Social Security refunds or rebates. In another
situation, a taxpayer may really be due a credit or refund but uses
inflated information to complete the return.
Beware. Intentional mistakes of this kind can result in a $5,000 penalty.
False/Inflated Income and Expenses
Including income that was never earned, either as wages or as
self-employment income in order to maximize refundable credits, is
another popular scam. Claiming income you did not earn or expenses you
did not pay in order to secure larger refundable credits such as the
Earned Income Tax Credit could have serious repercussions. This could
result in repaying the erroneous refunds, including interest and
penalties, and in some cases, even prosecution.
Additionally, some taxpayers are filing excessive claims for the fuel
tax credit. Farmers and other taxpayers who use fuel for off-highway
business purposes may be eligible for the fuel tax credit. But other
individuals have claimed the tax credit when their occupations or income
levels make the claims unreasonable. Fraud involving the fuel tax
credit is considered a frivolous tax claim and can result in a penalty
of $5,000.
False Form 1099 Refund Claims
In this ongoing 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.
Don’t fall prey to people who encourage you to claim deductions or
credits to which you are not entitled or willingly allow others to use
your information to file false returns. If you are a party to such
schemes, you could be liable for financial penalties or even face
criminal prosecution.
Frivolous Arguments
Promoters of 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. These arguments are false and have been thrown
out of court. While taxpayers have the right to contest their tax
liabilities in court, no one has the right to disobey the law.
Falsely Claiming Zero Wages
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.
Sometimes, fraudsters even include an explanation on their Form 4852
that cites statutory language on the definition of wages or may include
some reference to a paying company that refuses to issue a corrected
Form W-2 for fear of IRS retaliation. Taxpayers should resist any
temptation to participate in any variations of this scheme. Filing this
type of return may result in a $5,000 penalty.
Abuse of Charitable Organizations and Deductions
IRS examiners continue to uncover the intentional abuse of 501(c)(3)
organizations, including arrangements that improperly shield income or
assets from taxation and attempts by donors to maintain control over
donated assets or the income from donated property. 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.
Disguised Corporate Ownership
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. The IRS is
working with state authorities to identify these entities and bring the
owners into compliance with the law.
Misuse of Trusts
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.
IRS personnel have seen an increase in the improper use of private
annuity trusts and foreign trusts to shift income and deduct personal
expenses. As with other arrangements, taxpayers should seek the advice
of a trusted professional before entering a trust arrangement.
