Top Five Tax Scams and Schemes to Watch Out For

For some reason the IRS did not release an updated “Dirty Dozen Tax Scam List” for 2013. This annual list of tax scams and “phishing” expeditions warns taxpayers about scams that range from tax identity theft to tax evasion. As tax day draws near, scams and schemes tend to peak as people get their tax returns ready for the April 15th deadline. I updated information from the Tax Resolution University archive to feature the top five IRS tax scams all taxpayers should be aware of and avoid at all costs:

Identity Theft

Identity theft is so pervasive; the IRS.gov website has dedicated an entire section to it. Because every year more people file their tax returns online, the IRS has been forced to spend more resources preventing, detecting and resolving identity theft issues than ever before. To the IRS, identity fraud cases are:

  • Among the most complex for the IRS to handle thus creating big IRS tax issues for the Agency and taxpayers.
  • Always changing. Identity thieves are always looking for ways to use legitimate taxpayer identification and personal info to file a tax return to obtain a fraudulent refund.
  • Difficult for taxpayers to detect after being victimized. Many are unaware until they receive a letter from the IRS notifying them that two returns were filed in their name.

The IRS sees an annual increase more complex of cyber-crimes and schemes that make prevention and enforcement the toughest challenge for the IRS to date. This previous post highlights the tax identity fraud case of friend, Robert Sullivan so you know it can happen to anyone.

Phishing

Cyber-thieves know that more and more people conduct their financial business online including filing their taxes. Therefore, their clever trick approaches taxpayers either by e-mail or through a fake yet convincing looking IRS website to ask for personal and financial information. With this information, thieves have the ability to commit identity or financial theft or both; wreaking havoc on a taxpayer’s life. AN IMPORTANT POINT TO REMEMBER:  the IRS NEVER initiates contact with taxpayers by email to request personal or financial information.  Ever. This includes any type of electronic communication, such as text messages or through social media. The IRS requests that if you receive an unsolicited email appearing to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), you report it by sending it to phishing@irs.gov.

Return Preparer Fraud

Every paid preparer as of 2012 must have a Preparer Tax Identification Number (PTIN). This number gets entered on every return he or she prepares. Taxpayers should make every attempt to prevent IRS tax problems and are advised to watch that their tax preparer doesn’t exhibit the following:

  • Does not sign the return or place a PTIN on it.
  • Does not give you a copy of your tax return.
  • Promises larger than normal tax refunds.
  • Charges a percentage of the refund amount as preparation fee.
  • Requires you to split the refund to pay the preparation fee.
  • Adds forms to the return you have never filed before.
  • Encourages you to place false information on your return, such as false income, expenses and/or credits.

Hiding Income Offshore

Taxpayers have legitimate reasons for maintaining financial accounts abroad, but must comply with mandatory reporting requirements such as FBAR. U.S. taxpayers who do not comply are breaking the law and will be subject to significant IRS penalties and fines (up to 100% of the value of the asset) and the possibility of criminal prosecution. Since 2009 when the government first introduced the voluntary offshore program, it has collected $3.4 billion from would be tax cheats. Hiding offshore assets is becoming increasingly more difficult, so it’s best to come clean and comply.

“Free money” from the IRS

This scam uses flyers or advertisements to promise “free money” from the IRS and suggests that taxpayers are able to file a tax return with little or no documentation. This information is usually spread by word-of mouth to well-meaning people who are allured by the idea of “free money.” Sadly, scammers specifically target low-income, elderly taxpayers often through their church or place of worship, not a place where one imagines IRS tax problems lurking. Often the victims are unaware they were scammed until the IRS rejects their claim and the thieves are long gone.

Other tax scams to watch out for:

  • Social security tax scam
  • False/Inflated income and expenses
  • False Form 1099 Refund Claims
  • Frivolous Arguments
  • Falsely claiming Zero Wages
  • Abuse of Charitable Organizations and Deductions
  • Disguised Corporate Ownership
  • Misuse of Trusts

Remember: The IRS holds you responsible for the information you give them, even if someone else prepares your taxes and will come after you for payment, no matter what. It’s important you remain vigilant and aware – you’d be surprised how easy it is to get scammed. Check the IRS.gov website for complete details on tax fraud/scam prevention and reporting.

More Tax Help, IRS News and Tax Relief Tips:

  1. IRS Warns of “Dirty Dozen” Tax Scams
  2. Senate Confirms Keneally to Fight Tax Crime
  3. Treasury Proposes Multilateral Agreement for Offshore Compliance
  4. Offshore Banking-Swiss Tax Evasion Advisors Indicted
  5. FATCA-No Tax Relief for Americans Living Abroad

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