The IRS 'dirty dozen' tax scams
byMar 25th 2008 12:12PM
The key to avoiding IRS scams is no different than any other scam consumers may encounter: If it sounds too good to be true, it probably is. There are a lot of claims about mysterious free money and magical tax refunds you never knew about. Well, they're simply not true.
Here are the top scams the IRS has identified this year and how you can spot them:
1. Phishing – You get an email that tells you that information is needed from you to in order to process your refund or clarify a tax problem. You click on the link and provide all kinds of personal information that helps criminals empty your bank account or get credit in your name. Never respond to an email that purports to be from the IRS and never use a link in an email to provide private information.
2. Economic Stimulus rebate scams – Con artists are trying to get their hands on your tax rebate, and you haven't even gotten it yet! They're trying to get you to turn over bank account information and social security numbers, saying this information is necessary to process your check. Don't believe them! The IRS is not operating this way!
3. Frivolous tax arguments – Criminals are promoting fraudulent tax avoidance schemes that promise you won't have to pay income taxes. Don't pay them a fee for what amounts to wrong advice. The IRS has published a long list of excuses that taxpayers might try to use to avoid paying taxes, but they don't work. Don't get caught up in a scheme like this that will cost you lots of money in terms of tax, interest, penalties, and legal assistance down the road.
4. Fuel tax credit scam – The IRS has a legitimate tax credit related to certain nontaxable uses of fuel, often correctly claimed by farmers. Other taxpayers have been trying to claim this credit when they don't qualify, so you should be careful to follow all the rules related to this credit.
5. Hiding income offshore – Putting money in overseas banks to try to conceal your income is illegal. Don't fall for the claims of an offshore bank that wants your business and is willing to give you a debit card or credit card for access to your money. Income must be reported according the tax laws, and using a foreign bank account to hide your income will get you into a lot of trouble.
6. Abusive retirement plans – Some investment advisers help taxpayers avoid contribution limits for Roth IRAs by lying about the values of assets that are moved into the accounts. If you're moving assets into a retirement account, make sure that the correct fair market value is being properly claimed so you don't run into troubles later if the IRS examines your tax returns.
7. Zero wages – Tax cheats might tell you that you can file a "zero" wage tax return to avoid paying taxes. They're wrong. If you have income listed on a W-2, you're not allowed to "correct" that information to show zero wages and therefore avoid taxes. It's not legit, and can get you in trouble.
8. False claims for refunds – Some scammers try to get refunds for tax returns that they've never filed. If you don't file a tax return, the IRS will calculate and assess a tax liability for you based upon the information they have. You can't just throw out their numbers and demand a refund of all your taxes. That's not how the law works, and don't let anyone convince you to pay them to help you go down that path.
9. Return preparer fraud – Yes, tax return preparers can commit fraud and can be on the hook for it. There are some out there who are charging inflated fees for their services or who are stealing a portion of people's refunds. Buyer beware!
10. Disguised corporate ownership – Taxpayers have been known to create shell corporations with no real operations that are simply used to hide or disguise income. Using such entities to under report income, avoid filing tax returns, launder money, or engage in other financial crimes is wrong, and the IRS is on the lookout for these schemes.
11. Misuse of trusts – Tax scammers have long been promoting the use of trusts to avoid paying income taxes. There are legitimate uses for trusts, and they can help shield money legally from income taxes. But consumers must be very careful that what they're doing is legal. The way you do that is by working with reputable professionals who are known for doing the best trust and estate work.
12. Abuse of charitable organizations and deductions – Taxpayers have been creating allegedly tax-exempt organizations to try to shield income or take bad deductions. They're also trying to take deductions for items that aren't charitable contributions -- such as private school tuition -- and the IRS is cracking down.
So long as our tax code is this complex, there will always be scams that prey on the ignorance of consumers. Each year this list of scams is a little bit different, but taxpayers should be aware that there are many more tax scams than just those listed here. Be on the lookout for unusual schemes that are presented to you. When in doubt, contact the IRS directly for assistance in determining whether or not you're being scammed.
Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.