For some, the term “dirty dozen” may bring to mind the World War II action movie, or the Environmental Working Group’s list of the fruits with the highest pesticide concentration, but it means something very different to the Internal Revenue Service (IRS). Each year, the IRS releases a list of their “dirty dozen” – the twelve most prevalent tax scams affecting the nation’s taxpayers.
The IRS creates this list to raise awareness of the various types of schemes that may affect taxpayers’ returns, and to offer guidance on steps that can be taken to help prevent falling victim. Many of these scams involve criminals preying on Americans’ fear of both the IRS and of making an error on their tax return, or their desire for a greater refund or smaller tax bill.
Whether you have already filed your 2014 tax returns or not, you should be on the lookout for these scams so that you do not fall victim. Ultimately, as the taxpayer, you are responsible for what is on your return regardless of who prepares it.
- Phone Scams: Criminals impersonating IRS agents make aggressive and threatening phone calls to taxpayers. Typically, scam artists threaten arrest, deportation, license revocation or other punishment to scare taxpayers into providing identifying information or sending money. Remember: The IRS will never initiate contact with a taxpayer over the phone. If you owe money to the IRS, you will receive a written notice first.
- Phishing: Common avenues for scam artists are fake emails or websites that steal personal information. Be wary of clicking on strange emails and websites that appear to be from the IRS. The IRS will not initiate contact by email about a bill, refund, or any other matter.
- Identity Theft: Tax season is a peak time for identity theft. Criminals and scam artists use other taxpayers’ Social Security numbers to file fraudulent returns to obtain refunds. Carefully guard your personal information to not fall victim to identify theft. If you have reason to believe that you have been the victim of identity theft, contact your Aronson tax advisor immediately.
- Return Preparer Fraud: Taxpayers need to be careful of dishonest or corrupt tax return preparers. While most tax preparers provide quality service, some set out to commit identity theft, refund fraud, and other scams. Be careful to choose a preparer that is legitimate.
- Offshore Tax Avoidance: The IRS is cracking down on Americans hiding money offshore, and is becoming more successful in its enforcement of this method of tax cheating. It is highly recommended that taxpayers voluntarily get their international filing requirements in order. The IRS offers the Offshore Voluntary Disclosure Program (OVDP) to help taxpayers do so.
- Inflated Refund Claims: If anyone promises you an extravagant refund, asks you to sign a blank return, or charges fees based on a percentage of the refund, you should be wary about handing over the preparation of your return.
- Fake Charities: Taxpayers must be cautious of the charitable organizations to which they choose to contribute. There are numerous groups that fraudulently appear to be a charitable organization to obtain donations from unsuspecting individuals. Take some time to ensure you are donating to a legitimate and eligible charity and watch out for charities that have similar names to well-known organizations.
- Hiding Income with Fake Documents: This type of fraud involves the use of doctored or fake documents in an attempt to hide or reduce taxable income. Most sources of income are independently reported to the IRS, so this scam may slow down the matching process, but the IRS will eventually come after the taxpayer for the tax due, plus penalties and interest.
- Abusive Tax Shelters: Taxpayers should be wary of complex tax avoidance schemes, and steer clear of the use of abusive tax structures in an attempt to avoid taxes. If you are questioning a method to reduce your tax liability or avoid paying tax in any form, you should seek an independent opinion regarding its legality.
- Falsifying Income to Claim Credits: While most scams involve hiding or shifting income to reduce a tax bill, many taxpayers inflate their income to meet certain thresholds for refundable tax credits. This scam can create a refund for a taxpayer who owes little or no tax. Again, most sources of income are reported to the IRS, so eventually the Service will come knocking.
- Excessive Claims for Fuel Tax Credits: This tax credit is not available to the majority of taxpayers, but is routinely used as a way to claim a credit and inflate refunds. This credit is only available for fuel purchased for non-highway business use, such as farming. The IRS has instituted measures to carefully scrutinize returns claiming this credit, as it is a frequent vehicle for tax scammers.
- Frivolous Tax Arguments: Every year, taxpayers raise numerous arguments as to why they, or their wages, are not subject to taxation, and every year these arguments are struck down as frivolous claims. Taxpayers have the right to contest their tax liabilities in court; however, their claims must have a sound legal basis. The IRS can assess a $5,000 penalty for filing a frivolous tax return.
In the next few months, Aronson’s tax advocacy experts will be releasing more in-depth blogs regarding some of these tax scams. However, if you are concerned you have fallen victim to one of these scams or want further information on the dirty dozen, please contact Patrick M. Deane, JD, MBA, LLM or Laurence C. Rubin, CPA at 301.231.6200.