IRS warns of 'Dirty Dozen' tax scams
by Mar 17th 2010 4:00PM
While there may be a long history of tax cheats, there's also a solid record of con artists that prey on those who are trying to do right by Uncle Sam. Among some of this year's chart toppers are hiding offshore accounts and tax preparer fraud.
"Taxpayers should be aware of anyone peddling scams that seem too good to be true," said IRS Commissioner Doug Shulman in the announcement. The agency warned that taxpayers who fall prey to such scams will be on the hook for unpaid taxes, plus interest and fees, and could even face jail time.
So without any further adieu, here's the "Dirty Dozen" tax scams to avoid when filing your taxes this year.
1. Return preparer fraud. You may think that hiring a tax preparer is the best way to ensure that you're doing your taxes the right way, but unfortunately that's not always the case. Fraudulent tax preparers may do anything from helping themselves to a portion of your refund, to charging way too much to do your taxes or rigging it so that you get a refund that you don't really deserve (and thus encouraging you to use their services again). The IRS is implementing a number of changes that it hopes will help prevent such frauds in upcoming years. The agency wants to put a system in place that requires all paid tax return preparers (with some exceptions like CPAs and attorneys who have already been vetted) to register with the IRS, obtain a preparer tax identification number, take competency tests and enroll in courses.
2. Hiding income offshore. This shouldn't come as a big surprise, but the IRS doesn't want you to hide your money in an offshore account in order to avoid paying taxes. The agency has been cracking down on offshore accounts (after all, it really wants its money). On its Web site, the IRS says it "continues to urge taxpayers with offshore accounts or entities to voluntarily come forward and resolve their tax matters." Yeah, good luck with that.
3. Phishing. That's the lingo for con artists who phish, or "fish," for unsuspecting victims and try to get them to reveal private information that they can use to steal their identity and their money. These scams "can take the form of e-mails, tweets or phony web sites. Scammers may also use phones and faxes to reach their victims," the IRS says. In such cases, the con tells the victim that they are entitled to a refund from the IRS, but to get the money, you have to prove who you are by revealing your Social Security number or other private information. Suddenly, the victim learns that their bank account has been cleaned out, or that their credit card has been run up into the thousands of dollars. If you get any weird, suspicious emails that look like they're from the IRS but you suspect aren't, send them onto firstname.lastname@example.org.
4. Filing false or misleading forms. Some people file false or misleading returns, hoping to claim refunds that they aren't supposed to get. "Phony information returns, such as a form 1099-Original Issue Discount (OID), claiming false withholding credits usually are used to legitimize erroneous refund claims. One version of the scheme is based on a false theory that the federal government maintains secret accounts for its citizens, and that taxpayers can gain access to funds in those accounts by issuing 1099-OID forms to their creditors, including the IRS," the agency says.
5. Nontaxable Social Security benefits with exaggerated withholding credit. Inflating your withholding when reporting nontaxable Social Security benefits can result in no income being reported to the IRS on your tax return. This is one mistake that can cost you. Get caught reporting the wrong income and/or withholding amount and you may get slapped with a $5,000 fine.
6. Abuse of charitable organizations and deductions. There are plenty of ways charitable contributions are mishandled on tax forms (come on, that flannel shirt you donated to the Salvation Army is not worth $1,000), but the IRS is onto a scam where several organizations are claiming donations of the same non-cash item, the value of which is typically inflated. In some of these scams, the organization agrees to sell the item back to the donor later at a price that's favorable to the donor.
7. Frivolous arguments. The IRS gets it. Some people don't think they should pay taxes and they feel they're legally entitled to opt out. Well, if you think you have a legal case for not paying your taxes, you may want to check out the IRS's page on "Frivolous Tax Arguments in General." It's a list of arguments people have used in hopes of getting out of paying their taxes. Don't waste your time trying any of these: None of them will wash with the IRS. So if you want to argue that the only employees subject to federal income tax are employees of the federal government -- well, guess what? They've heard that one before.
8. Abusive retirement plans. Conducting a transaction that allows you to either a.) circumvent the contribution limits on your Roth IRA or b.) improperly report early distributions could end up costing you your nest egg. "Taxpayers should be wary of advisers who encourage them to shift appreciated assets at less than fair market value into IRAs or companies owned by their IRAs to circumvent annual contribution limits," the IRS warns.
9. Disguised corporate ownership. If you own a business, but you're trying to hide the fact that you own it (say, by using someone else to request an employer identification number) in order to avoid paying your fair share of taxes for the company -- well, the IRS is looking for you.
10. Zero wages. Some taxpayers go out of their way to make it look like they earned little or nothing during the tax year. Often these fraudsters will use a Form 4852 (Substitute Form W-2) or a "corrected" Form 1099 to make it look like their taxable income is zero.
11. Misuse of trusts. If someone offers to transfer your assets into a trust (like a private annuity or foreign trust) and promises that a reduction in income tax and estate or gift taxes will follow, think twice. These trusts are often used to hide income and assets from the IRS -- and they often don't deliver on their tax perks, either. The IRS advises that taxpayers should "seek the advice of a trusted professional before entering into a trust arrangement."
12. Fuel tax credit scams. I can envision plenty of people accidentally scamming the IRS simply because they hope they're eligible for a fuel tax credit and claim it. But chances are, you aren't eligible. (This is where tax preparation software or a tax preparer really can steer you away from such boneheaded moves.) The IRS says that some taxpayers, like farmers who use fuel for off-highway business purposes, are often eligible for the fuel tax credit, but a lot of people "are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable." Those who improperly claim that credit may end up with a $5,000 fine -- that kind of money could buy a lot of gas.
Geoff Williams is a frequent contributor to WalletPop. He is also the co-author of the new book Living Well with Bad Credit.