Each year, the Internal Revenue Service (IRS) issues a list of common tax schemes they call the “Dirty Dozen.” Taxpayers may encounter the “Dirty Dozen” schemes and scams at any time but they tend to peak during filing season as taxpayers prepare their returns or hire someone to help with their taxes.
For 2016, the IRS has identified these “Dirty Dozen” tax schemes as the ones to watch:
- Identity Theft. Identity theft which results in tax fraud tops the IRS Dirty Dozen list again. Identity theft, when someone uses your personal information such as your name, Social Security number (SSN) or other identifying information, without your permission, is often used by scammers to fraudulently file a tax return and claim a refund. The IRS considers combating identity theft and refund fraud a top priority and has been taking steps to boost fraud prevention, early detection, and victim assistance, including establishing a new awareness campaign: Taxes. Security. Together. If you believe you are at risk of identity theft due to lost or stolen personal information, contact the IRS Identity Protection Specialized Unit at 1.800.908.4490 or visit the IRS’ special identity protection page. (For more tips on how to protect yourself from identity theft, click here.)
- Phone Scams. It’s no surprise to see phone scams near the top of the list. Phone scams have been making the rounds with callers pretending to be from the agents or other IRS representatives in hopes of stealing money or identities from victims. Over the past two years, nearly 4,550 victims have collectively paid over $23 million to scammers posing as IRS officials. Typically, in the scheme, callers posing as IRS representatives say the victims owe money and then threaten arrest if the amount is not paid immediately. Callers may be targeting immigrants or calling after hours or during times when it might be inconvenient to contact the IRS for verification. The IRS has noted a few patterns in these calls such as:
- Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
- Scammers may be able to recite the last four digits of a victim’s Social Security Number.
- Scammers “spoof” or imitate the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
- Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
- Victims hear background noise of other calls being conducted to mimic a call site.
- After threatening victims with jail time or a driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.
If you get a phone call from someone claiming to be from the IRS and you’re not sure and you have a legitimate tax issue outstanding, call the IRS at 1.800.829.1040. If you get a phone call from someone claiming to be from the IRS and you know you don’t owe taxes, report the incident to the Treasury Inspector General for Tax Administration (TIGTA) at 1.800.366.4484.
- Phishing. Phishing is a scam where criminals attempt to steal your financial information through the use of email or a fake website. In many cases, the bogus emails ask for specific personal information or entice you to click on a link in order to install spyware or other malware on your computer for the purpose of stealing your financial and personal information. Remember that the IRS doesn’t initiate contact with taxpayers by email to request personal or financial information, so don’t click on or respond to these kinds of emails. 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), you can report it by forwarding it to email@example.com. Also be careful with emails purporting to be from companies like TurboTax, where a bogus email or a fake website poses as a legitimate site in order to get you to disclose your personal or financial information. When in doubt, assume it’s a scam.
- Return Preparer Fraud. Nearly two-thirds of taxpayers rely on professional tax preparers to assist them with their returns. Most tax preparers are good people but some unscrupulous preparers may try to encourage taxpayers to claim improper credits, deductions or exemptions in hopes of boosting refunds. Use care when choosing a preparer and remember that taxpayers should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs). Remember that you are responsible for the information on your tax return even if it is prepared by a professional: You cannot hide behind a tax professional’s signature if you took an inappropriate position on your tax return. For more on choosing a tax preparer, click here. For how not to choose a tax preparer, click here.
- Hiding Money or Income Offshore. It is not illegal to have cash, brokerage accounts or other investments in foreign countries. It is, however, illegal to use those accounts to evade U.S. taxes by hiding that income. There are significant reporting requirements for offshore assets, including FBAR (Report of Foreign Bank and Financial Accounts) filings. Taxpayers who do not properly report and disclose those accounts are breaking the law and could face civil and criminal penalties and fines. Pay attention to reporting requirements and if you need to make a disclosure because you failed to report in the past, you may want to consider the Offshore Voluntary Disclosure Program (OVDP). Qualifying taxpayers who come in through the program can catch up on filing and payment requirements and avoid heavy fines and criminal prosecution.
- Inflated Refund Claims. With more than 50% of taxpayers expected to receive a tax refund, it’s no surprise that everyone wants their share – and some, even more than their share. This makes it appealing for scam artists to promise free money in the form of inflated refunds. There are a number of variations on these refund scams but tops of the list are refunds based on fictitious Social Security benefits and false claims for education credits, the Earned Income Tax Credit (EITC), and the American Opportunity Tax Credit. In addition to the trouble it may cause you to sort out the errors – and large fees paid to the scammers – you could be penalized for filing false claims or receiving fraudulent refunds. Intentional mistakes of this kind can result in a $5,000 penalty. Also a risk? The IRS has received complaints of scam victims who lost their federal benefits, such as Social Security benefits, certain veteran’s benefits or low-income housing benefits after filing tax returns with the IRS that provided false income amounts.
- Fake Charities. Bona fide charitable organizations have, as their mission, to benefit the public. Fake charities take advantage of taxpayers’ good nature in order to steal your money and potentially, your identity. Fake charities often pop up after disasters like the 2015 South Carolina floods. To avoid being taken advantage of, donate to recognized charities using check or credit card where possible. Remember that you don’t need to give out personal information, like your Social Security number, for the purpose of obtaining a receipt for your charitable donation. The best documentation on your end is a canceled check or credit card receipt so donate using those means on secure sites whenever possible. (Find more tips for donating to charity here.)
- Falsely Padding Deductions. Taxpayers are entitled to claim legitimate deductions on their tax returns including those for education, mortgage interest, and charity. Taxpayers are often tempted or enticed to claim “just a little bit more” for charitable deductions or business miles that they did not travel. However, overstating deductions – even just a little – is improper and can lead to significant civil penalties and criminal prosecution.
- Excessive Claims for Business Credits. There’s no law that says you have to pay more in tax than you have to – but you do have to follow the rules. Claiming excessive business credits in order to illegally reduce your taxes is improper. Two schemes, in particular, have attracted the attention of the IRS: fraud involving the fuel tax credit and the research credit. Unsupported claims for tax credits may subject taxpayers to penalties and interest.
- Falsifying Income To Claim Tax Credits. It’s usual to think of taxpayers hiding income in order to avoid taxation but there’s another scheme involving misrepresenting income: inflating or including income on a tax return that was never earned, either as wages or as self-employment income, in order to maximize credits, especially refundable credits. Refundable tax credits are those like the Earned Income Tax Credit and the Additional Child Tax which require earned income in order to qualify. With a refundable credit, you can receive a refund even if you do not owe any tax. This provides some taxpayers (and unscrupulous preparers) with an incentive to lie about income in order to claim the credit. Taxpayers who engage in this behavior not only have to pay back the erroneous refunds, including interest and penalties but may face criminal prosecution.
- Abusive Tax Shelters. Abusive tax shelters don’t have to be enormous multi-million dollar tax schemes: they can involve simple trust arrangements, offshore tax schemes, and the use of multiple pass-through companies (like Limited Liability Companies (LLCs) and Limited Liability Partnerships (LLPs)) to hide ownership of the taxable income and/or assets. Remember that when something feels “too good to be true,” it probably is: you generally can’t legally avoid taxation by creating multiple layers of companies or trusts or by manipulating the ownership of assets. Legitimate tax planning is not the same as tax evasion. Don’t get sucked into schemes promoted by advisors who promise you that you can permanently avoid taxation by buying their shelters and/products.
- Frivolous Tax Arguments. The IRS warns against using common frivolous tax arguments made by those who oppose compliance with federal tax laws. Examples of frivolous tax arguments include contentions that taxpayers can refuse to pay taxes on religious or moral grounds by invoking the First Amendment; that the only “employees” subject to federal income tax are employees of the federal government; and that only foreign-source income is taxable. The penalty for taking one of these positions on a tax return is $5,000; additional penalties may also apply, including criminal prosecution. You can read more at the IRS’ 2016 version of “The Truth about Frivolous Tax Arguments.”