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12 Tax Frauds You Should Beware of in 2014

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Tax fraud
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What do tax fraud and the "Dirty Dozen" have in common?

"The Dirty Dozen" is an awesome 1967 WWII movie starring Lee Marvin as Major John Reisman, who is tasked with turning 12 soldiers convicted of felonies into an elite commando squad designed to infiltrate a secret meeting of Nazi leaders.

The "Dirty Dozen" is also an annual list put out by the Internal Revenue Service of the year's most common tax frauds. Even though these scams can be perpetrated anytime, they tend to peak during filing season.

"The IRS wants to get the word out on these schemes," says David Knecht, a partner at CPA-firm Milam, Knecht, & Warner in Glendale, Calif., "which is why they release the list during tax season."

Here is the 2014 list of tax frauds, schemes and scams.

1. Identify Theft

This occurs when someone uses your personal information, such as your Social Security number, without your permission to file a fraudulent tax return or to commit some other crime. It is the most common tax scam that the IRS sees.

2. Telephone Scams

According to the IRS, there has been an uptick recently in telephone scams, many of which focus on specific communities. This scam generally involve callers representing themselves as being an IRS agent, usually giving a fake name and badge number. Some scammers even go as far as "spoofing" the toll-free IRS phone number so that when victims check their caller ID, it looks as if the call is legitimate.

3. Phishing

In this type of scam, victims will receive an unsolicited email from what looks like the IRS. The email will prompt them to go to an IRS website - - once again, fake - - and ask them to enter in personal information. Once that information is captured, the scammer use that information to commit fraud or other crimes in the victims' names.

4. False Promise of "Free Money" from Inflated Refunds

This fraud is targeted toward low-income individuals, the elderly and non-English speakers, and it occurs when con artists posing as tax preparers promise outsized tax refunds. After providing inaccurate advice and "preparing" returns which they claim the will file for the victims, they charge a large fee. By the time the scam has been found out -- usually by receipt of an IRS notice -- the scammers are long gone.

5. Return Preparer Fraud

This is similar to the previous scam except that the tax preparers are legitimate, just not ethical. Once again targeting those who are most vulnerable, they will often take the taxpayers' information and use it for refund fraud or identity theft.

6. Hiding Income Offshore

Taxpayers participating in what they believe are legitimate business or investment deals may find that their money is being held in offshore accounts. Although there are justifiable -- and legal -- reasons that monies may be held in foreign accounts, there are special reporting requirements for those accounts. Taxpayers or preparers not aware of those requirements may find themselves accidentally at the wrong end of an IRS audit.

7. Impersonating Charitable Organizations

Often, following a natural disaster, scam artists represent themselves as being from a legitimate charity. The contact can come via telephone or email, with the promise that all donations are tax-deductible. Sometimes even disaster victims are contacted during these schemes, with the implication being that the scammers is working on behalf of the IRS to aid victims.

8. False Income, Expenses, or Exemptions

The taxpayer willfully engages in this scam. It includes such things as claiming unearned income or listing false expenses in order to maximize a refund. In some cases, taxpayers will inflate the number of dependents they claim to get the tax credit for each.

9. Frivolous Arguments

Though not a scam in the traditional sense in that there is no beneficiary, if a taxpayer tries to avoid paying taxes by claiming that an income tax is unconstitutional –- or by using a similarly outlandish argument -- they can definitely become a victim. This is because those who take such a radical stance are not looked kindly upon by the IRS. Various penalties can be imposed on "tax deniers," including criminal prosecution and in some cases jail time.

10. Falsely Claiming Zero Wages or Using a False Form 1099

Again, this is a scam taxpayers perpetrate, in which they claim that wages paid by a company are not in fact "wages," but something else ,such as reimbursements for expenses paid out of pocket or a loan. The claim is often made that the company who paid wages is at fault and refuses to issue a corrected W-2 for fear of IRS retaliation.

11. Abusive Tax Structures

This type of scam is very complex and is usually employed to benefit taxpayers in the highest tax brackets.
By using limited liability companies, limited liability partnerships, international business companies or a host of other legitimate business structures in a non-traditional way, the scammer sets up a structure which attempts to create a "tax-neutral" entity. Unsuspecting victims are encourage to buy into these arrangements, with the promise of eliminating or substantially reducing their tax liabilities.

12. Misuse of Trusts

Trusts are commonly used in tax and estate planning, and when done properly are completely legal. However, the IRS also sees a lot abuse in trusts, with taxpayers, either with encouragement from a self-proclaimed "tax professional" or by their own initiative, putting questionable transactions into a trust alongside legitimate ones.

Another subset of trust fraud is the attempt to use a trust -- illegally -- to transfer wealth from one generation to the next without incurring taxes.

"Scams can be sophisticated and take many different forms," says IRS Commissioner John Koskinen. "We urge people to protect themselves and use caution when viewing emails, receiving telephone calls, or getting advice on tax issues."

The IRS website has more details about the "Dirty Dozen," as well as suggestions about how to protect yourself against tax fraud. (And for the Lee Marvin movie, check out Netflix.)

No man is an island, or even a peninsula, so I encourage your feedback in the comments below. And don't forget to pick up my book, "Trading: The Best of the Best -- Top Trading Tips for Our Time".

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