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Presenting the IRS Dirty Dozen Tax Scams for 2015: Part 2

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Feb 10th 2015
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Last week, we covered the first week of IRS press releases on the annual “Dirty Dozen tax scams” encountered by taxpayers. Here’s a summary of the second round, which concluded on February 6.

7. Fake charities (IR-2015-16, 1/30/15):  Following a major disaster, it’s common for scam artists to impersonate charities to pry away money or private information from well-intentioned taxpayers. Scammers may reach out to people by telephone or email to solicit money or financial information. They may even contact disaster victims directly and claim to be working for or on behalf of the IRS to help facilitate casualty loss claims and tax refunds.

The IRS advises taxpayers to be wary of charities with names similar to familiar or nationally known organizations. Don’t give out personal financial information, such as Social Security numbers or passwords, to anyone soliciting contributions.

8. False 1099s and W-2s (IR-2015-18, 2/2/15): Filing a phony information return, such as a Form 1099 or W-2, is an illegal way to lower tax liability. Some scofflaws use self-prepared, “corrected,” or otherwise fake forms that improperly report taxable income as zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a third-party payer to the IRS.

Another scheme is to use false Form 1099 refund claims. Such claims may be based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS. The courts have consistently rejected this tax dodge and perpetrators have received significant penalties, imprisonment, or both.

9. Abusive tax shelters (IR-2015-19, 2/3/15): These have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies utilizing foreign financial secrecy laws or credit/debit cards issued by offshore financial institutions. Typically, multiple flow-through entities—including Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and similar instruments—are an integral part of a complex tax evasion scheme.

Also, unscrupulous promoters continue to urge taxpayers to transfer large amounts of assets into trusts. The assets include not only cash and investments, but also successful ongoing businesses. Although trusts may legitimately be used for tax and estate planning, the IRS often sees highly questionable transactions.

10. Falsifying income (IR-2015-20, 2/4/15): Some individuals falsely increase the income they report to the IRS. This scam involves inflating or including income on a tax return that was never earned, either as wages or as self-employment income, usually to maximize refundable credits like the Earned Income Tax Credit (EITC).

Taxpayers may encounter criminal return preparers who encourage this practice. As with fraudulent claims for an expense or deduction you did not pay, falsifying income to secure larger refundable credits could have serious repercussions. This could result in taxpayers facing a large bill to repay the erroneous refunds, including interest and penalties. In some cases, they may even face criminal prosecution.

11. Excessive claims for fuel credits (IR-2015-21, 2/5/15): The fuel tax credit is generally limited to off-highway business use or use in farming. Consequently, it isn’t available to most taxpayers. But the IRS routinely finds unscrupulous preparers who have enticed sizable groups of taxpayers to erroneously claim the credit to inflate their refunds.

Improper claims for the fuel tax credit generally come in two forms. An individual or business may make an erroneous claim on their otherwise legitimate tax return or an identity thief may claim the credit in a broader fraudulent scheme. The IRS has established additional filters for ferreting out the tax cheats.

12. Frivolous tax arguments (IR-2015-23, 2/6/15): The IRS and the courts hear many arguments to avoid filing returns or paying taxes. Taxpayers should be wary of scam artists and promoters peddling outlandish arguments.

To assist taxpayers, the IRS has released its 2015 version of The Truth about Frivolous Tax Arguments.This 69-page document describes and responds to some of the common frivolous tax arguments made by those who oppose compliance with federal tax laws. Examples include contentions that taxpayers can refuse to pay taxes on religious or moral grounds by invoking the First Amendment. The cases cited in the document demonstrate how the IRS and the courts will treat these arguments.

Those who promote or adopt frivolous positions risk a variety of penalties—including an accuracy-related penalty, a civil fraud penalty, an erroneous refund claim penalty and a failure-to-file penalty—as well as prosecution for a felony.

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