IRS Announces "Dirty Dozen" Tax Scams – Identity Theft Is Top Threat

By Frank Byrt

The IRS has issued its annual "Dirty Dozen" list of tax scams for 2013 to remind taxpayers to use caution during tax season to protect themselves against a wide range of schemes, ranging from identity theft to impersonation of charitable organizations. Taxpayers could be prey to scams at any point during the year, but the threat peaks during tax-filing season, the IRS said. 
 
"This tax season, the IRS has stepped up its efforts to protect taxpayers from a wide range of schemes, including moving aggressively to combat identity theft and refund fraud," said IRS Acting Commissioner Steven T. Miller. "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."
 
The Dirty Dozen 
 
1. Identity theft: This leads the list, as it did last year, as incidences of identity theft continue to grow. Identity theft occurs when someone uses a taxpayer's personal information, such as a person's name, Social Security number, or other identifying information, without permission to commit fraud or other crimes. In many cases, an identity thief uses a legitimate taxpayer's identity to fraudulently file a tax return and claim a refund. For more information, visit the IRS identity theft page
 
2. Phishing: Phishing is a scam typically carried out with the help of unsolicited e-mail or a fake website. A phisher attempts to lure in potential victims and prompt them to provide personal and financial information that can result in identity theft or financial theft. The IRS asks that those who receive an unsolicited e-mail 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), report it by sending it to phishing@irs.gov.
 
3. Return preparer fraud: About 60 percent of taxpayers will use tax professionals this year to prepare their tax returns. A small number of unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft. The IRS recommends taxpayers only use preparers who sign the returns they prepare and who enter their IRS Preparer Tax Identification Number (PTIN).
 

"Dirty Dozen" Tax Scams – Warn Your Clients

  1. Identity theft
  2. Phishing
  3. Return preparer fraud
  4. Hiding income offshore
  5. "Free money" from the IRS and tax scams involving Social Security
  6. Impersonation of charitable organizations
  7. False or inflated income and expenses
  8. False Form 1099 refund claims
  9. Frivolous arguments
  10. Falsely claiming zero wages
  11. Disguised corporate ownership
  12. Misuse of trusts
 
4. Hiding income offshore: Evading US taxes by hiding income in offshore banks, brokerage accounts, or nominee entities and then using debit cards, credit cards, or wire transfers to access the funds is a frequently seen scam. Sometimes foreign trusts, employee-leasing schemes, private annuities, or insurance plans are used for the same purpose.
 
New foreign account reporting requirements being phased in over the next few years will make hiding income offshore increasingly more difficult. At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP), which allows individuals to voluntarily disclose their foreign financial accounts and take advantage of special opportunities to resolve their US tax obligations. The IRS has collected $5.5 billion so far from people who participated in OVDP since 2009.
 
5. "Free money" from the IRS and tax scams involving Social Security: Advertisements for free money from the IRS suggest that a taxpayer with minimal income and who normally would not have a tax-filing requirement, can file a tax return with little or no documentation and collect a refund. These schemes, which charge for preparing the return, tend to prey on low-income individuals and the elderly. The perpetrators may also encourage taxpayers to make fictitious claims for refunds or rebates based on false statements of entitlement to tax credits. 
 
There are also similar scams that promise nonexistent Social Security refunds or rebates. In another situation, a taxpayer may really be due a credit or refund but uses inflated information to complete the return. Intentional mistakes of this kind can result in a $5,000 penalty.
 
6. Impersonation of charitable organizations: Following major disasters, it is common for scam artists to impersonate charities in order to get money or private information from well-intentioned taxpayers. Some operate bogus charities and contact people by telephone or e-mail to solicit money or financial information, or they may contact disaster victims directly and claim to be working for, or on behalf of, the IRS to help victims file casualty loss claims and get tax refunds. 
 
The IRS offers victims of natural disasters, such as Hurricane Sandy, and people wishing to make charitable donations the following tips:
  • To help disaster victims, donate to recognized charities.
  • Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities. 
  • Do not give out personal financial information, such as Social Security numbers or credit card and bank account numbers and passwords, to anyone who solicits a contribution. 
  • Do not give or send cash. For security and tax-record purposes, contribute by check, credit card, or another way that provides documentation of the gift.
Disaster victims with specific questions about tax relief or disaster-related tax issues can call the IRS' toll-free disaster assistance number: (866) 562-5227.
 
7. False or inflated income and expenses: Reporting income that was never earned, either as wages or as self-employment income, in order to maximize refundable credits could have serious repercussions. This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.
 
8. False Form 1099 refund claims: In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for US citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS. In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099, Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return.
 
9. Frivolous arguments: Promoters of frivolous tax 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. These arguments are false and have been thrown out of court. 
 
10. Falsely claiming zero wages: Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a "corrected" Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.
 
Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. 
 
11. Disguised corporate ownership: In this type of scam, third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business. These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions, and facilitate money laundering and financial crimes. 
 
12. Misuse of trusts: For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are legitimate uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses, and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS. The IRS has also seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. 
 
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