WASHINGTON — As the deadline for filing income tax returns quickly approaches, the Internal Revenue Service this week issued its “Dirty Dozen” taxpayer scams in an effort to protect those who may fall victim to preparer fraud and may be coaxed into hiding income overseas.
Tax schemes are illegal and can lead to imprisonment and fines for both scam artists and taxpayers. Taxpayers pulled into these schemes must repay unpaid taxes plus interest and penalties.
The warning comes at a time when the number of taxpayers using outside assistance has increased. Between 1993 and 2005, the number of taxpayers who prepared their own tax returns fell more than two-thirds. For 2007 and 2008, over 80 percent of all federal tax returns were filed either using a tax return preparer or software. The IRS begins its “Dirty Dozen” list by addressing return preparer fraud.
If the taxpayer is promised a refund which sounds too good to be true, it most likely is, said IRS Commissioner Doug Shulman. Be leery of preparers who are not registered with the IRS. All tax return preparers are now required to register with the IRS and obtain a preparer tax identification number (PTIN). This is in addition to both competency tests and ongoing continuing professional education for all paid tax return preparers except attorneys, certified public accountants (CPAs) and enrolled agents.
Shady preparers may skim a portion of their client’s refunds or charge inflated fees, IRS officials said.
Another illegal strategy taxpayers are advised to not partake in is hiding income overseas. The IRS is aggressive in its pursuit of these offenders, as well as anyone who is involved in this process. Some evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities, or insurance plans. If these taxpayers come forth voluntarily, however, it may mitigate their risk of criminal prosecution. Last year, 14,700 voluntary disclosures were received.
Phishing is the third method of scheming that the IRS lists. Phishing is when scam artists trick unsuspecting victims into revealing personal or financial information online. These impersonation schemes flourish during the filing season and typically take the form of e-mails, tweets, phone calls or phony Web sites.
The easiest way to ensure that any divulged personal information is going to a safe source is to make sure that the Web address begins with www.irs.gov. If you receive suspicious contact, inform the IRS at email@example.com.
The fourth problem encountered is filing false or misleading forms. In this instance, taxpayers fabricate an information return and falsely claim the corresponding amount to receive a tax refund. Claiming false withholding credits are usually used to legitimize erroneous refund claims.
The fifth scam involves nontaxable Social Security benefits with exaggerated withholding credits. This tactic results in no income reported on the IRS tax return. Errors on this type of return may result in a $5,000 penalty.
Another abuse involves charitable organizations and deductions. A common method is for several organizations to claim the full value for both the receipt and distribution of the same non-cash contribution.
Frivolous arguments are also among the scams listed by the IRS. Promoters of frivolous schemes get people to make outlandish claims, such as suggesting that the filing of a tax return is voluntary. Arguments like these are false and have been thrown out of court.
Eighth, the abuse of retirement plans is when taxpayers shift appreciated assets at less than fair market value into Roth Individual Retirement Arrangements (IRAs) or companies owned by their IRAs.
Ninth on the IRS list is disguised corporate ownership. Sometimes companies are created solely to disguise the ownership of the business or financial activity. In extreme cases, these entities are even used to facilitate terrorism financing.
Tenth on this list is the problem of providing false numbers for wage or income-related information, which lowers the amount of taxes owed. Typically a form 4852 (substitute form W-2) is used as a way to reduce taxable income to zero. Participating in this also warrants a $5,000 penalty.
The next item the IRS cites is the misuse of trusts. The IRS acknowledges that there are obviously legitimate uses of trusts in tax and estate planning, but this does not include the reduction of income subject to tax.
Last on this “Dirty Dozen” list is fuel tax credit scams. Concisely put, the IRS receives claims for the fuel tax credit that are excessive, and often the taxpayers income level makes the claim unreasonable. An example of someone eligible would be farmers who use fuel for off-highway business purposes.
Suspected tax fraud can be reported to the IRS using Form 3949-A.