The Dirty Dozen listing, compiled by the
"Taxpayers should be on the lookout for tax scams using the
Illegal scams can lead to significant penalties and interest and possible criminal prosecution. The IRS’s Criminal Investigation unit works closely with the
The following are the Dirty Dozen tax scams for 2014:
Identity TheftTax fraud through the use of identity theft tops this year’s Dirty Dozen list. Identity theft occurs when someone uses your personal information, such as your name,
The agency’s work on identity theft and refund fraud continues to grow, touching nearly every part of the organization. For the 2014 filing season, the
Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should contact the
These phone scams include many variations, ranging from instances where callers say the victims owe money or are entitled to a huge tax refund. Some calls can threaten arrest and threaten a driver’s license revocation. Sometimes the calls are paired with follow-up calls from people saying they are from the local police department or the state motor vehicle department.
Characteristics of these scams can include:
• Scammers use fake names and
• Scammers may be able to recite the last four digits of a victim’s Social Security Number.
• Scammers “spoof” or imitate the
• Scammers sometimes send bogus
• Victims hear background noise of other calls being conducted to mimic a call site.
After threatening victims with jail time or a driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.
In another variation, one sophisticated phone scam has targeted taxpayers, including recent immigrants, throughout the country. Victims are told they owe money to the
If you or one of your clients receives a phone call from someone claiming to be from the
If you know you or your client doesn’t owe taxes or have no reason to think that any taxes are owed (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to the
If you or a client have been targeted by these scams, you should also contact the
PhishingPhishing is a scam typically carried out with the help of unsolicited email or a fake Web site that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.
If you or a client receive an unsolicited email that appears to be from either the
It is important to keep in mind the
False Promises of “Free Money” from Inflated RefundsScam artists routinely pose as tax preparers during tax time, luring victims in by promising large federal tax refunds or refunds that people never dreamed they were due in the first place.Scam artists use flyers, advertisements, phony store fronts and even word of mouth to throw out a wide net for victims. They may even spread the word through community groups or churches where trust is high. Scammers prey on people who do not have a filing requirement, such as low-income individuals or the elderly. They also prey on non-English speakers, who may or may not have a filing requirement.
Scammers build false hope by duping people into making claims for fictitious rebates, benefits or tax credits. They charge good money for very bad advice. Or worse, they file a false return in a person's name and that person never knows that a refund was paid.
Scam artists also victimize people with a filing requirement and who are due a tax refund by promising inflated refunds based on fictitious
While honest tax preparers provide their customers a copy of the tax return they’ve prepared, the
Taxpayers should take care when choosing an individual or firm to prepare their taxes. Honest return preparers generally ask for proof of income and eligibility for credits and deductions; sign returns as the preparer; enter their
Tax Return Preparer FraudAbout 60 percent of taxpayers will use tax professionals this year to prepare their tax returns, according to the
“It is important to choose carefully when hiring an individual or firm to prepare your return,” said the
IRS.gov has general information on reporting tax fraud. Taxpayers can also report abusive tax preparers to the
Hiding Income OffshoreOver the years, numerous individuals have been identified as evading U.S. 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. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.
While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.
Since 2009, tens of thousands of individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore is increasingly more difficult.
At the beginning of 2012, the
Impersonation of Charitable OrganizationsAnother long-standing type of abuse or fraud is scams that occur in the wake of significant natural disasters.
Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics, the
They may attempt to get personal financial information or
• 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 to which donations may be tax-deductible.
• Don’t give out personal financial information, such as
• Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.
False Income, Expenses or ExemptionsAnother scam involves inflating or including income on a tax return that was never earned, either as wages or as self-employment income in order to maximize refundable credits. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions. This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.
In addition, some taxpayers are filing excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. But other individuals have claimed the tax credit although they were not eligible. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of
Frivolous ArgumentsPromoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The
Those who promote or adopt frivolous positions risk a variety of penalties. For example, taxpayers could be responsible for an accuracy-related penalty, a civil fraud penalty, an erroneous refund claim penalty, or a failure to file penalty. The Tax Court may also impose a penalty against taxpayers who make frivolous arguments in court.
Taxpayers who rely on frivolous arguments and schemes may also face criminal prosecution for attempting to evade or defeat tax. Similarly, taxpayers may be convicted of a felony for willfully making and signing under penalties of perjury any return, statement, or other document that the person does not believe to be true and correct as to every material matter. Persons who promote frivolous arguments and those who assist taxpayers in claiming tax benefits based on frivolous arguments may be prosecuted for a criminal felony.
Falsely Claiming Zero Wages or Using False Form 1099Filing 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
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
Some people also attempt fraud using 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 U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the
Abusive Tax StructuresAbusive tax schemes have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions.
What is an abusive scheme? The Abusive Tax Schemes program encompasses violations of the Internal Revenue Code (IRC) and related statutes where multiple flow-through entities are used as an integral part of the taxpayer's scheme to evade taxes. These schemes are characterized by the use of Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and other similar instruments. The schemes are usually complex involving multi-layer transactions for the purpose of concealing the true nature and ownership of the taxable income and/or assets.
Form over substance are the most important words to remember before buying into any arrangements that promise to "eliminate" or "substantially reduce" your tax liability. The promoters of abusive tax schemes often employ financial instruments in their schemes. However, the instruments are used for improper purposes including the facilitation of tax evasion.
Misuse of TrustsTrusts also commonly show up in abusive tax structures. They are highlighted here because unscrupulous promoters continue to urge taxpayers to transfer large amounts of assets into trusts.
These assets include not only cash and investments, but also successful on-going businesses. There are legitimate uses of trusts in tax and estate planning, but the
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