The IRS Dirty Dozen Tax Scams

 Every year, the Internal Revenue Service announces its “Dirty Dozen” ranking of tax scams. While the Service says many of these arise during the year, there is a scheme peak during tax filing season. IRS warns that “scam artists will tempt people in person, online and by e-mail with misleading promises about lost refunds and free money”. I am sure as a lawyer you have received notification from a Nigerian bank which desperately needs to wire transfer huge sums of money to your attorney trust account. All that is asked in return is the account and routing numbers to get in the game. Needless to say, this is not the most sophisticated scam in the world.

So here goes the rest from the most to least significant tax scams:

The winner, which has made the list for the last several years, is none other than identity theft. IRS sees identity thieves filing what appear to be legitimate tax returns requesting fraudulent refunds. In this case, IRS will notify a taxpayer that more than one return was filed in the taxpayer's name. That notice may be the first tip-off that the individual has been victimized. According to IRS in 2011 it stopped more than $1.4 billion of taxpayer refunds going into the wrong hands due to identity theft. IRS maintains a special identity theft page on its website IRS.gov/identity theft.

According to IRS, tax return preparer fraud comes in second on the list as tax return preparers have been known to skim off their clients’ refunds, charge inflated fees and attract new clients by promising guaranteed or extravagant refunds. In 2012 every preparer must have a preparer tax identification number which is entered on the tax return he or she prepares. Taxpayers should be alert to preparers who do not provide a copy of the tax return or charge a percentage of the refund amount as a preparation fee or add bogus forms to the tax return never before filed.

Rounding out the trifecta is Phishing. Here fake emails and websites request both personal and financial  information. IRS urges taxpayers to report any such contact to pfishing@irs.gov. There are a few fake IRS websites that truly look like the real McCoy.

Coming in just behind the leaders is hiding income offshore. The IRS is wising up to this technique which involves offshore banks, brokerage accounts, debit and credit cards or wire transfers to access funds. Taxpayers involved in undisclosed or illegal offshore accounts face both civil penalties and criminal prosecution. IRS does maintain come-clean disclosure rules. See IRS.gov for any current version.

In fifth position sweeping up the rear, is free money from the IRS or rebates from Social Security. You have to love this one. Among the pile of mostly useless e-mails all of us receive every day is often an urgent message that IRS is holding your money. IRS says scammers here prey on low income individuals and the elderly.The“elderly”now includes most of my friends.

False income and expenses. While once considered being the next Milton Bradley board game, the IRS does take a dim view of claiming deductions and expenses to which you are not entitled. Popular scam deductions and credits include the earned income tax credit, which by virtue of Congressional magic can result in a refund even when no tax payments have even been made.

Frivolous arguments. Now that is a catchy phrase. The IRS maintains a list of arguments it considers to be frivolous, which are unreasonable and outlandish claims to avoid paying the taxes owed. Take a look at the IRS website for help here.

Falsely claiming zero wages. Here the taxpayer is urged to file a substitute form W-2 or a corrected form 1099, thereby throwing the IRS computers into a tizzy and sending refunds out of nowhere.

Abuse of charitable organizations and deductions. IRS continues to examine intentional abuse of 501(c)(3) organizations using highly overvalued contributions by donors.

Disguised corporate ownership. In this scam third parties are used to request employer identification numbers and create corporations that obscure true ownership of a business. The new business may be used to claim false deductions and facilitate money laundering and other financial crimes.

The improper use of trusts. Promoters here urge taxpayers to transfer assets into trusts promising the reduction of income tax, deductions for otherwise personal expenses as well as reduced estate or gift taxes. According to IRS there has been an increase in the improper use of private annuity trust and foreign trusts.

There you have it. Happy Tax Season.