The IRS has completed compiling its list of “Dirty Dozen” tax scams for 2016 and warns that the frequency of these schemes often peaks during the filing season. So, taxpayers, beware the following scams that use the IRS as a lure:
1. Identity theft. Tax-related identity theft occurs when someone uses a stolen Social Security number to file a tax return claiming a fraudulent refund. The agency urges people to use caution when viewing emails, receiving telephone calls or getting advice on tax issues. Only give out your Social Security number when absolutely necessary, and keep your personal information secure by protecting your computers.
2. Phone scams. Beware the aggressive, threatening “IRS agent” who calls unannounced to demand a payment for taxes owed in lieu of arrest, court action, deportation, license revocation and other things. The IRS does not notify taxpayers of taxes owed by phone, does not require specific payment methods (i.e., prepaid debit cards) and does not ask for credit or debit card numbers over the phone. And the IRS certainly does not demand immediate payment or threaten to bring in law enforcement.
If you receive such a call, hang up immediately and report it to the U.S. Treasury Inspector General for Tax Administration at 800-366-4484, or use their IRS Impersonation Scam Reporting Web page. You can also report it to the Federal Trade Commission via FTC Complaint Assistant on www.ftc.gov (add “IRS Telephone Scam” in the notes). If you think you may owe tax money, call the IRS at 800-829-1040.
3. Phishing. Have you ever received an unsolicited email from your bank or another business requesting you to reset your password via a provided link? If so, you’ve encountered a “phishing” scheme. These scammers create fake emails or websites that look like the real deal—all to trick you into providing passwords, account numbers, etc. that can lead to stealing your funds. Another method is to hack into email accounts and send mass emails under another person’s name. In some instances, scam emails and websites can infect computers with malware designed to give scammers access to files or track keyboard strokes to expose login information.
Financial and government institutions, as well as most businesses, will not initiate contact by email to request passwords or personal/financial information. If a taxpayer receives 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, report it by sending it to firstname.lastname@example.org.
4. Fake charities. Groups masquerading as charitable organizations will often use names or websites that are similar to those of legit organizations. This is why it’s important to research organizations before giving away your hard-earned money. A good way to do this is through the IRS’ Select Check database of tax-exempt organizations. It is also good practice to never give or send cash (checks and credit can be tracked) and NEVER provide personal information (i.e., Social Security numbers or passwords).
5. Inflated refund claims. The vast majority of tax professionals provide honest, high-quality service. However, there are some unscrupulous tax return preparers who promise outlandish tax refunds, often based on federal benefits or tax credits you’ve never heard of or weren’t eligible to claim in the past. These individuals will often misfile or falsify refund claims, which can lead to fines and lost federal benefits for the taxpayer. (See the last paragraph for finding qualified tax return preparers.)
6. Return preparer fraud. Much like the inflated refund claims scam listed above, there are some who set up shop each filing season to perpetrate refund fraud, identity theft and other scams. They steal from clients and misfile their taxes. That’s why unscrupulous preparers who prey on unsuspecting taxpayers make the Dirty Dozen list every year.
7. Hiding money/income offshore. Those who avoid taxes by hiding money or assets in unreported offshore accounts may face criminal charges leading to billions of dollars in fines and restitutions. It is simply not worth it. While there are legitimate reasons for maintaining financial accounts abroad, U.S. taxpayers must follow the reporting requirements to avoid breaking the law.
8. Falsely padding deductions on returns. Think twice before “fudging” the numbers to get a better refund or lesson what you owe. Those who are caught inflating deductions (i.e., charitable contributions, business expenses) or claiming credits they are not entitled to (earned-income or child tax credits) can face civil penalties and steep fines. The IRS can normally audit returns filed within the last three years. Additional years can be added if substantial errors are identified or fraud is suspected.
9. Excessive claims for business credits. Avoid the temptation to claim business credits for which your business is not entitled. These can include the fuel tax credit, which is generally limited to off-highway business use or farming, and the research tax credit, under which qualified research expenses must meet certain requirements. Falsified claims can lead to fines and criminal prosecution.
10. Falsifying income to claim tax credits. This scam involves inflating or including income on a tax return that was never earned, either as wages or as self-employment income, usually to maximize refundable credits. Taxpayers found guilty of this scam could face a large bill to repay the erroneous refunds, including interest and penalties. In some cases, they may even face criminal prosecution. Bottom line: Don’t fake your income.
11. Abusive tax shelters. Abusive tax shelters and structures are designed to conceal the true nature and ownership of taxable income and/or assets. They include misuse of trusts and “captive” insurance. Whether something is “too good to be true” is important to consider before buying into any arrangements that promise to eliminate or substantially reduce your tax liability. If an arrangement uses unnecessary steps or a form that does not match its substance, then that arrangement is an abusive scheme.
12. Frivolous tax arguments. The IRS warns taxpayers against using frivolous tax arguments to avoid paying taxes—or risk paying even more in penalties and interest. Examples of tax-avoidance arguments include contentions that taxpayers can refuse to pay taxes on religious or moral grounds by invoking the First Amendment. The penalty for filing a frivolous tax return is $5,000. This does not include a variety of other penalties that may be imposed in addition to the $5,000.
Well-intentioned taxpayers who fall victim to items 5 through 12 are often misled by preparers who don’t understand taxes or who deceive people into taking credits or deductions they aren’t entitled to so they can increase their fee.
Remember, taxpayers are legally responsible for what’s on their returns, even those prepared by someone else. To find a tax preparer with the right qualifications, search the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications. (Rest assured, the staff from Ramsay and Associates, Ltd, is on this list.)