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Dirty Dozen Tax Scams
IRS Releases the Dirty Dozen Tax Scams for
2012.
IR-2012-23,
Feb. 16, 2012
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.
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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.
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