The 'Dirty Dozen' tax scams of 2013
Identity theft used to steal refunds again tops the list of the most common wrongdoings perpetrated against taxpayers.
This post is by Kelly Phillips Erb at Forbes.com.
Each year, the Internal Revenue Service issues a list of "Dirty Dozen" tax scams that can affect taxpayers. The list runs the gamut from schemes involving taxpayer participation (hiding offshore income) to schemes that taxpayers may know nothing about (identity theft). The IRS posts the list to educate taxpayers about the need to protect financial information and use common sense.
Acting IRS Commissioner Steven Miller reminds taxpayers, about the potential for fraud: "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."
Here are the Dirty Dozen scams for 2013:
1. Identity theft. Identity theft that 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 or other identifying information can be 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. As a result, during 2012, the IRS prevented the issuance of $20 billion of fraudulent refunds, including those related to identity theft, compared with $14 billion in 2011. A comprehensive identity theft sweep followed in early 2013. The IRS now has 3,000 people working on identity-theft related cases, more than twice the number from two years ago.
If you believe you are at risk of identity theft because of lost or stolen personal information, contact the IRS Identity Protection Specialized Unit at 800-908-4490 or visit the IRS’ special identity protection page.
2. 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 install spyware or other malware on your computer for the purpose of stealing your financial and personal information.
The IRS does not 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 firstname.lastname@example.org.
3. Return preparer fraud. Nearly two-thirds of taxpayers will use tax professionals this tax season to prepare their tax returns. The majority of tax preparers are good people but some 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).
Be careful: Taxpayers are legally responsible for the information on their 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.
If you have concerns about an abusive tax preparer, you can report him or her to the IRS.
4. Hiding 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.
The IRS has opened voluntary disclosure programs to encourage taxpayers to come forward to report foreign accounts and come into compliance. Since 2009, about 38,000 individuals have come forward voluntarily to disclose their foreign financial accounts and have paid nearly $5.5 billion to the IRS. As a result of that success, the IRS has reopened the Offshore Voluntary Disclosure Program (OVDP). This program will be open for an indefinite period (in plain speak: they’ll close it down when interest wanes).
5. "Free money" from the IRS and tax scams involving Social Security. There isn’t any such thing as "free money" but that hasn’t stopped scammers from trying to convince taxpayers otherwise. In cases where taxpayers might not even need to file an income tax return based on low income, taxpayers may be talked into filing returns with fictitious claims for refunds or rebates based on false statements or the promise of non-existent Social Security refunds or rebates.
Current versions of these scams often focus on the elderly and church congregations and appear to be targeting those in the South and Midwest. The folks that promote these schemes have been posting flyers and advertisements claiming that free money is available from the IRS and securing that money requires little or no documentation.
Others advise that the elderly may still claim credits that have expired (like the Making Work Pay Credit) or credits that would ordinarily not be available (such as claiming the American Opportunity Tax Credit when you are not paying for education). Since these scammers are “partnering” with churches, based on false promises to the congregation and staff of the church, some taxpayers believe that the claims must be true. They are not.
Tax, penalty and interest due as a result of these “mistakes” are payable by the taxpayer and, if those “mistakes” are intentional, can result in a $5,000 penalty.
6. Impersonation of charitable organizations. 2012 was a tough year for many taxpayers because of natural disasters, including Hurricane Isaac and Superstorm Sandy. Sadly, scam artists use these disasters as opportunities to cash in, either by operating bogus charities to solicit money or financial information or claiming to be affiliated with existing charitable organizations. They do this by soliciting funds by phone or email or using fake web sites.
To avoid being taken advantage of, donate to recognized charities using check or credit card where possible. If you’re not sure about the charity, you can search the IRS charitable organization database or use a respected charity database like Charity Navigator. (For the 100 Largest Charities, and their efficiency ratings, click here.)
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.
Finally, if you are the victim of a disaster and you have tax questions, you can call the IRS toll-free disaster assistance telephone number (866-562-5227).
7. False/inflated income and expenses. Refundable tax credits are credits that are refunded to you even if you did not owe a tax liability. Taxpayers may be encouraged to bump income amounts in order to those maximize refundable credits (like the Earned Income Tax Credit). These scams are prohibited and making false statements could result in having to repay those refunds plus interest and penalties; in some cases, you may be criminal prosecuted.
Specifically, the IRS is also seeing an uptick in taxpayers filing excessive claims for the fuel tax credit. Generally, this credit is available to farmers and other taxpayers who use fuel for off-highway business purposes; it is not available for trucks driven on highways. As a result, most taxpayers are not eligible for this credit. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.
8. False Form 1099 refund claims. For years, scammers have touted a bogus theory that taxpayers can access cash through a redemption scheme. Here’s how the redemption scheme works: Tax "professionals" (and I use the term loosely) file a series of false tax forms in an effort to garner large fraudulent tax refunds. Promoters of the scheme tell customers that the federal government maintains "secret" accounts of money for its citizens. Taxpayers are advised that they can gain access to the funds -- and discharge their debts -- by issuing forms 1099-OID to their creditors. It’s like magic!
Only, it’s not. Those claims are clearly false and filing such returns could subject you to financial penalties or criminal prosecution.
9. 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 and you can read about many of them in this IRS publication.
You’ve heard many of them before -- like the argument that the 16th amendment was never ratified. If you claim what is considered to be a frivolous position on your tax return, you could be subject to substantial fines and penalties, including an immediate assessment of a $5,000 penalty -- even if there is no understatement of liability -- in addition to any other penalty.
10. Falsely claiming zero wages. Some taxpayers may be convinced that they can reduce their taxable income to zero by filing a phony federal form 4852 (Substitute Form W-2) or a "corrected" Form 1099. Often, these forms include statutory language explaining why the income that was initially reported on a Form W-2 or Form 1099 did not fit the definition of wages. This scheme has been proven to be bogus and filing a return with these false forms may result in a $5,000 penalty.
11. Disguised corporate ownership. Some scammers like to think of tax returns as a shell game. The idea is that if you create enough entities, you can hide where income is really going or manufacture false deductions. Tax crimes are serious business as are money laundering and other financial crimes. Hiding income or assets in an attempt to evade paying tax or making certain disclosures can result criminal prosecution.
12. Misuse of trusts. There are many legitimate uses for trusts, which range from asset protection to estate planning to management of assets in the event of incapacity. I should know: It’s part of my job to draft many of them.
However, creating trusts for the purpose of tax evasion, including hiding income or generating bogus deductions, is not an appropriate use of trusts. You should exercise special caution when creating foreign trusts, irrevocable trusts or any trusts that have, as their main purpose, the reduction or elimination of tax. In some circumstances, those could be legitimate uses of trusts. Be sure to consult with a trusted adviser before entering into any trust agreements for the purpose of tax or estate planning.
As always, avoiding trouble at tax time involves using common sense. If it sounds too good to be true, it probably is.
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