The Internal Revenue Service today issued its annual “Dirty Dozen” list of tax scams that could trick taxpayers out of their money this tax season.
It's a list compiled by the IRS every year, and while it was released during tax season, these are schemes people can fall victim to at any point during the year. However, the peak season for these schemes is filing season as people prepare their tax returns.
"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," said IRS Acting Commissioner Steven T. Miller in a press release from the IRS. "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."
The IRS said its Criminal Investigation team works with the Department of Justice to shut down scams and prosecute the criminals behind them. Illegal scammers can face significant penalties and criminal prosecution.
Tax fraud due to identity theft tops this year's Dirty Dozen list. The IRS said often times, an identity thief will use a legitmate taxpayer's identity to file a tax return and claim the refund.
The IRS said in a press release that taking down identity thieves is a top priority for the IRS. It's put additional steps in place to minimize identity theft and detect fraud before it occurs to limit the number of victims of identity theft. In 2012, the IRS prevented $20 billion in fraudulent refunds from being issued - that's up from $14 billion in 2011.
The IRS posted tips for taxpayers, YouTube videos and an assistance guide on how to avoid identity theft on a special section of it website. If you think your identity has been stolen, you're asked to contact the IRS Identity Protection Specialized Unit at 800-908-4490.
Taxpayers should be on the lookout for unsolicited emails or fake websites asking for personal and financial information. It's a scam called phishing and the IRS said, armed with that information, a criminal can commit identity 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 email@example.com.
Also, the IRS reminded people it will never contact you by email to request personal or financial information.
Return Preparer Fraud
The IRS said choosing the right return preparer is important because it could result in fraud or identity theft. It said only use preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers. It included tips on choosing a preparer, red flags and details on preparer qualifications at www.irs.gov/chooseataxpro.
Hiding Income Offshore
The IRS said it works closely with the Department of Justice to prosecute people 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.
It reminded people, while there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements. If not reported, you could get significant penalties and fines, as well as criminal prosecution.
“Free Money” from the IRS & Tax Scams Involving Social Security
IRS reminded people to be wary of flyers or advertisements for free money from the IRS. These scams suggest that a taxpayer can file a tax return with little to no documentation. These flyers have been appearing in community churches around the country.
It preys upon people with little to no income and elderly people; they wouldn't normally have to file taxes. IRS said these scammers charge people money and offer bad advice, which includes making fictitious claims for refunds or rebates based on false statements of entitlement to tax credits.
Impersonation of Charitable Organizations
The IRS said con artists will prey upon natural disasters by impersonating charities to get money or private information. It said this scam comes in many forms - scam artists could contact people via telephone to get money and information, or call victims posing as the IRS to help them file casualty loss claims or get a tax refund. In the wake of Hurricane Sandy, the IRS cautioned both victims and people to only donate to recognized charities. Also, be wary of charities with names similar to familiar or nationally known organizations.
IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible.
Call the IRS toll-free disaster assistance telephone number (1-866-562-5227) if you are a disaster victim with specific questions about tax relief or disaster related tax issues.
False/Inflated Income and Expenses
The IRS said including income that was never earned, either as wages or as self-employment income in order to maximize refundable credits, is another popular scam. It's a move that could have serious repercussions because you could wind up repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.
Also, people file excessive claims for the fuel tax credit and it can result in a $5,000 penalty.
False Form 1099 Refund Claims
The IRS said people make refund claims on the false theory that the federal government maintains secret accounts for U.S. citizens and that they can gain access to the accounts by issuing 1099-OID forms to the IRS.
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.
The IRS said 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.
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. Taxpayers have the right to contest their tax liabilities in court.
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.
Disguised Corporate Ownership
The IRS said, third parties can be improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business.
These entities can be used to under-report income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering, and financial crimes. The IRS said it's working with state authorities to identify these groups and penalize their owners.
Misuse of Trusts
The IRS said people promote taxpayers to transfer assets into trusts under the assumption that it will mean less income subject to tax, deductions for personal expenses and reduced estate or gift taxes. However, the IRS said these trusts rarely deliver the tax benefits promised.