Similar to investing, if someone is pitching you a tax strategy that sounds too good to be true, then it probably is. With tax season in full swing now, the IRS has sent out its updated list of "dirty dozen" tax scams.
The victims of Bernie Madoff and Jordan Belfort probably had a moment when they thought, “this sounds too good to be true!” Later, they undoubtedly wished they had listened.
When it comes to investing and taxes, if someone’s pitch to make you big bucks or save a lot, or all, of your money sounds too good to be true, then it probably is. With tax season in full swing now, the IRS has sent out its annual list of “dirty dozen” tax scams.
"Taxpayers should be on the lookout for tax scams using the IRS name,” IRS Commissioner John Koskinen, said in a statement. “These schemes jump every year at tax time. Scams can be sophisticated and take many different forms. We urge people to protect themselves and use caution when viewing emails, receiving telephone calls or getting advice on tax issues.”
According to the IRS, not only can taxpayers involved in tax scams lose their money, but they can also face stiff penalties, interest and even criminal prosecution.
While these 12 scams are the most popular right now, there are other ways fraudsters can bilk you out of your money and leave you with the mess when the IRS comes calling.
12. Misuse of trusts
Last year: 12
Promoters often urge taxpayers to transfer large amounts of assets into trusts for the purpose of reducing taxable income, inflating deductions for personal expenses, reducing or eliminating self-employment taxes and reducing estate or gift transfer taxes. However, scams do not deliver the tax benefits promised.
11. Abusive tax structures
Last year: N/A
Abusive trust schemes have evolved into strategies that take advantage of financial secrecy laws of some foreign jurisdictions. These abusive tax schemes often involve sham business entities and dishonest financial arrangements for the purpose of evading taxes. The schemes often use Limited Liability Companies, Limited Liability Partnerships, International Business Companies, foreign financial accounts and offshore credit/debit cards.
The IRS warns taxpayers to be wary of arrangements that promise to “eliminate” or “substantially reduce” tax liability as they often aren’t legal.
10. Falsely claiming zero wages or using false Form 1099
Last year: 10 and 8 (separate entries)
Fraudsters sometimes use a Form 4852 or a “corrected” Form 1099 to improperly reduce taxable income to zero, which could result in a $5,000 penalty. The 1099 is also used for false refund claims because there’s a scam that the government has a secret account for every US citizen and a 1099-OID is the way to access the account.
Scammers may encourage you to claim deductions or credits that you are not entitled and you could be liable for financial penalties or even criminal prosecution.
9. Frivolous arguments
Last year: 9
The IRS has an entire list of frivolous tax arguments that should be avoided. These scammers encourage taxpayers to avoid paying taxes owed by making unreasonable claims. Taxpayers making such claims could be hit with an accuracy-related penalty, a civil fraud penalty, an erroneous refund claim penalty or a failure to file penalty, plus the Tax Court could impose a penalty against taxpayers who make frivolous arguments in court.
Criminal prosecution for attempting to evade or defeat tax is also a possibility, and taxpayers could also be convicted of a felony for perjury if they willfully make and sign returns, statements or other documents that they know aren’t true and correct.
8. False income, expenses or exemptions
Last year: 7
Inflating or including income that was never earned in an attempt to maximize refundable credits is tax fraud. This can result in repaying the refunds, plus interest and penalties, and possibly even prosecution.
One tax credit often incorrectly filed is for the fuel tax credit. Taxpayers who are eligible for this credit are farmers and others who use fuel for off-highway business purposes. Claiming the tax credit despite not being eligible is actually a frivolous claim and can result in a $5,000 penalty, according to the IRS.
7. Impersonation of charitable organizations
Last year: 6
These scams usually ramp up after a major disaster: Hurricane Sandy, the earthquake in Haiti, the bombing of the Boston Marathon. Taxpayers need to be sure they donate to recognized charities and aren’t getting scammed by people trying to get money or personal information.
According to the IRS, these scam artists may even contact disaster victims and claim to be working with the IRS to help the victims file casualty loss claims and get tax refunds. They often use phony charities with names or websites that look and sound similar to legitimate organizations.
For both security and tax purposes, the IRS recommends contributing by check, credit card or some other way that provides documentation.
6. Hiding income offshore
Last year: 4
Many wealthy taxpayers have offshore accounts, usually for valid reasons. However, certain reporting requirements must be met and anyone who tells you otherwise is wrong.. Not complying means large penalties and fines and possible criminal prosecution.
In 2009 the IRS has initiated a voluntary disclosure program. Taxpayers who were facing potential criminal prosecution for undeclared offshore accounts were encouraged to come forward and avoid prosecution by paying taxes due and penalties. The IRS has collected billions of dollars in back taxes, interest and penalties from these taxpayers. It is in the best interest of taxpayers to come forward and pay their fair share of taxes.
5. Return preparer fraud
Last year: 3
The majority of the country (60%) uses a tax professional to prepare their tax returns, and it’s important to choose carefully as there are preparers who prey on unsuspecting taxpayers. Tax preparers should sign the return and include their IRS Preparer Tax Identification Number (PTIN).
Not only can these preparers wreak havoc through refund fraud or identity theft, but the taxpayer is legally responsible for what is on the return.
There are plenty of honest return preparers, so do your homework. Before working with someone check the preparer’s PTIN and see if he or she has a questionable history through the Better Business Bureau.
Some red flags are if the preparer asks you to sign a blank return and if he or she doesn’t ask to see your records and receipts.
4. False promises of “free money” from inflated refunds
Last year: 5
Scammers posing as tax preparers lure victims in with promises of large federal tax refunds. Typically, they will pray on people who do not have a filing requirement, like low-income individuals or the elderly. They find their victims through flyers, advertisements, phony store fronts and word of mouth.
These scammers will charge money for bad advice and sometimes even file a false return in a person’s name, according to the IRS. As a result, some of the victims will find they have lost their federal benefits, such as Social Security benefits, veteran’s benefits or low-income housing benefits, because of these false claims.
However, you are legally responsible for your tax return, even if someone else prepares it and taxpayers falling for such schemes can be penalized.
Last year: 2
With how much we rely on the internet to bank and invest it might not seem suspicious if the for the IRS to do something similar. Taxpayers might receive unsolicited emails or be sent to fake websites by phishing scams. While these websites may appear legitimate, the truth is that the IRS does not initial contact with taxpayers by email to request personal or financial information, so be wary of any you receive.
Not only will the IRS not contact you via email, but it also will not text you or reach out through social media to gain any information or send you to a website to collect it. These scams can be reported to email@example.com.
2. Pervasive telephone scams
Last year: N/A
Phone scams are on the rise, according to the IRS. These callers pretend to be from the IRS and threaten individuals with arrest, revocation of business or driver’s license or deportation if the individual is an immigrant. These calls are usually followed by a call pretending to be from the local police or DMV.
Douglas B. Gordon, CPA, of Gordon & Associates, points out that the IRS initiates collection efforts by mail, not phone or email. So if you receive one of these phone calls and suspect it could be a scam, then report the incident to the Treasury Inspector General for Tax Administration at 1-800-366-4484.
These phone calls use very sophisticated techniques to trick taxpayers into thinking it is the IRS or local law enforcement calling.
1. Identity theft
Last year: 1
Still at the top of the list, identity theft is a huge issue all year round, but especially so during the tax season. The thief uses a taxpayer’s name, Social Security number or some other identifying information to commit fraud. However, in this instance, the scammer is typically using your information to file a fraudulent tax return and claim the refund.
Taxpayers should protect their tax information with strong passwords and beware of IRS impersonators looking to trick you into giving up your personal information.