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 The Dirty Dozen listing, compiled by the IRS each year, lists a
variety of common scams taxpayers can encounter at any point during
the year. But many of these schemes peak during filing season as
people prepare their tax returns.
"Taxpayers should be careful and avoid falling into a trap with
the Dirty Dozen," said IRS Commissioner Doug Shulman. "Scam artists
will tempt people in-person, online and by email with misleading
promises about lost refunds and free money. Don't be fooled by these
scams."
Illegal scams can lead to significant penalties and interest and
possible criminal prosecution. The IRS Criminal Investigation
Division works closely with the Department of Justice to shut down
scams and prosecute the criminals behind them.
The following is the list of Dirty Dozen tax scams for 2012:
1. Identity theft
Topping this year's Dirty Dozen list is identity theft. In
response to growing identity theft concerns, the IRS has embarked on
a comprehensive strategy that is focused on preventing, detecting
and resolving identity theft cases as soon as possible. In addition
to the law-enforcement crackdown, the IRS has stepped up its
internal reviews to spot false tax returns before tax refunds are
issued, as well as working to help victims of the identity theft
refund schemes.
Identity theft cases are among the most complex ones the IRS
handles, but the agency is committed to working with taxpayers who
have become victims of identity theft.
The IRS is increasingly seeing identity thieves looking for ways
to use a legitimate taxpayer's identity and personal information to
file a tax return and claim a fraudulent refund.
An IRS notice informing a taxpayer that more than one return was
filed in the taxpayer's name or that the taxpayer received wages
from an unknown employer may be the first tip-off the individual
receives that he or she has been victimized.
The IRS has a robust screening process with measures in place to
stop fraudulent returns. While the IRS is continuing to address
tax-related identity theft aggressively, the agency is also seeing
an increase in identity crimes, including more complex schemes. In
2011, the IRS protected more than $1.4 billion of taxpayer funds
from getting into the wrong hands due to identity theft.
In January, the IRS announced the results of a massive, national
sweep cracking down on suspected identity theft perpetrators as part
of a stepped-up effort against refund fraud and identity theft.
Working with the Justice Department's Tax Division and local U.S.
Attorneys' offices, the nationwide effort targeted 105 people in 23
states.
Anyone who believes his or her personal information has been
stolen and used for tax purposes should immediately contact the IRS
Identity Protection Specialized Unit. For more information, visit
the special identity theft page at
www.irs.gov/identitytheft.
2. Phishing
Phishing is a scam typically carried out with the help of
unsolicited email or a fake website 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 receive an unsolicited email that appears to be from
either the IRS or an organization closely linked to the IRS, such as
the Electronic Federal Tax Payment System, or EFTPS, report it by
sending it to phishing@irs.gov.
It is important to keep in mind that the IRS does not initiate contact
with taxpayers by email to request personal or financial
information. This includes any type of electronic communication,
such as text messages and social media channels. The IRS has
information that can help you protect yourself from email scams.
3. Return preparer fraud
About 60 percent of taxpayers will use tax professionals this
year to prepare and file their tax returns. Most return preparers
provide honest service to their clients. But as in any other
business, there are also some who prey on unsuspecting taxpayers.
Questionable return preparers have been known to skim off their
clients' refunds, charge inflated fees for return preparation
services and attract new clients by promising guaranteed or inflated
refunds. Taxpayers should choose carefully when hiring a tax
preparer. Federal courts have issued hundreds of injunctions
ordering individuals to cease preparing returns, and the Department
of Justice has pending complaints against many others.
In 2012, every paid preparer needs to have a Preparer Tax
Identification Number and enter it on the returns he or she
prepares.
Signals to watch for when you are dealing with an unscrupulous
return preparer would include that they:
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Do not sign the return or place a Preparer Tax
Identification
Number on it.
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Do not give you a copy of your tax return.
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Promise larger-than-normal tax refunds.
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Charge a percentage of the refund amount as
a preparation fee.
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Require you to split the refund to pay the preparation fee.
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Add forms you have
never filed before to the return.
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Encourage you to place false information on your return, such as
false income, expenses or credits.
For advice on how to find a competent tax professional, see "Tips
for Choosing a Tax Return Preparer."
4. Hiding income offshore
Over the years, numerous individuals have been identified as
evading U.S. taxes by hiding income in offshore banks, brokerage
accounts or nominee entities, 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.
The IRS uses information gained from its investigations to pursue
taxpayers with undeclared accounts, as well as the banks and bankers
suspected of helping clients hide their assets overseas. The IRS
works closely with the Department of Justice to prosecute tax
evasion cases.
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 and disclosure requirements are breaking the
law and risk significant penalties and fines, as well as the
possibility of criminal prosecution.
Since 2009, 30,000 individuals have come forward voluntarily to
disclose their foreign financial accounts, taking advantage of
special opportunities to bring their money back into 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 will become increasingly more
difficult.
At the beginning of this year, the IRS reopened the Offshore
Voluntary Disclosure Program, following continued strong
interest from taxpayers and tax practitioners after the closure of
the 2011 and 2009 programs. The IRS continues working on a wide
range of international tax issues and follows ongoing efforts with
the Justice Department to pursue criminal prosecution of
international tax evasion. This program will be open for an
indefinite period until otherwise announced.
The IRS has collected $3.4 billion so far from people who
participated in the 2009 offshore program, reflecting closures of
about 95 percent of the cases from the 2009 program. On top of that,
the IRS has collected an additional $1 billion from upfront payments
required under the 2011 program. That number will grow as the IRS
processes the 2011 cases.
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 5. "Free money" from the IRS and tax scams involving Social
Security
Fliers and advertisements for free money from the IRS, suggesting
that the taxpayer can file a tax return with little or no
documentation, have been appearing in community churches around the
country. These schemes are also often spread by word of mouth as
unsuspecting and well-intentioned people tell their friends and
relatives.
Scammers prey on low-income individuals and the elderly. They
build false hopes and charge people good money for bad advice. In
the end, the victims discover their claims are rejected. Meanwhile,
the promoters are long gone. The IRS warns all taxpayers to remain
vigilant.
There are a number of tax scams involving Social Security. For
example, scammers have been known to lure the unsuspecting with
promises of nonexistent Social Security refunds or rebates. In
another situation, a taxpayer may really be due a credit or refund
but uses inflated information to complete the return.
Beware. Intentional mistakes of this kind can result in a $5,000
penalty.
6. False or inflated income and expenses
Including income that was never earned, either as wages or as
self-employment income, in order to maximize refundable credits, is
another popular scam. 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.
Additionally, 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 when their
occupations or income levels make the claims unreasonable. Fraud
involving the fuel tax credit is considered a frivolous tax claim
and can result in a penalty of $5,000.
7. False Form 1099 refund claims
In this ongoing scam, the perpetrator files a fake information
return, such as a Form 1099 Original Issue Discount to justify a
false refund claim on a corresponding tax return. 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 IRS.
Don't fall prey to people who encourage you to claim deductions
or credits to which you are not entitled or willingly allow others
to use your information to file false returns. If you are a party to
such schemes, you could be liable for financial penalties or even
face criminal prosecution.
8. Frivolous arguments
Promoters of frivolous schemes encourage taxpayers to make
unreasonable and outlandish claims to avoid paying the taxes they
owe. The IRS has a list of frivolous tax arguments that taxpayers
should avoid. These arguments are false and have been thrown out of
court. While taxpayers have the right to contest their tax
liabilities in court, no one has the right to disobey the law.
9. Falsely claiming zero wages
Filing a phony information return is an illegal way to lower the
amount of taxes an individual owes. Typically, a Form 4852 -- a
substitute 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 IRS.
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 IRS retaliation. Taxpayers should
resist any temptation to participate in any variations of this
scheme. Filing this type of return may result in a $5,000 penalty.
10. Abuse of charitable organizations and deductions
IRS examiners continue to uncover the intentional abuse of
501(c)(3) organizations, including arrangements that improperly
shield income or assets from taxation and attempts by donors to
maintain control over donated assets or the income from donated
property. The IRS is investigating schemes that involve the donation
of non-cash assets -- including situations in which several
organizations claim the full value of the same non-cash
contribution. Often these donations are highly overvalued, or the
organization receiving the donation promises that the donor can
repurchase the items later at a price set by the donor. The Pension
Protection Act of 2006 imposed increased penalties for inaccurate
appraisals and set new standards for qualified appraisals.
11. Disguised corporate ownership
Third parties are improperly used to request employer
identification numbers and form corporations that obscure the true
ownership of the business.
These entities can be used to underreport income, claim
fictitious deductions, avoid filing tax returns, participate in
listed transactions, and facilitate money laundering and financial
crimes. The IRS is working with state authorities to identify these
entities and bring the owners into compliance with the law.
12. Misuse of trusts
For years, unscrupulous promoters have urged taxpayers to
transfer assets into trusts. While there are legitimate uses of
trusts in tax and estate planning, some highly questionable
transactions promise reduction of income subject to tax, deductions
for personal expenses, and reduced estate or gift taxes. Such trusts
rarely deliver the tax benefits promised and are used primarily as a
means of avoiding income tax liability and hiding assets from
creditors, including the IRS.
IRS personnel have seen an increase in the improper use of
private annuity trusts and foreign trusts to shift income and deduct
personal expenses. As with other arrangements, taxpayers should seek
the advice of a trusted professional before entering a trust
arrangement.
[Text from
Internal Revenue Service file received from
AgeOptions / Illinois SMP]
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