2016 IRS Dirty Dozen
The IRS annually releases what it calls a list of the worst tax scams of the year. These scams (we'll call the "dirty dozen") happen all year round, but they tend to peak during tax season.
- Identity theft - No. 1 on the list is tax-related identity theft. This as when someone uses a taxpayer's stolen Social Security number to file a return claiming a refund. Although the IRS has introduced more effective screening and detection systems that are designed to detect identity theft before it issues a refund, the Service admits it is still a major problem that it is working with states and tax preparers to solve.
- Phone scams - The second this year is phone scams, in which criminals call claiming to be the IRS. Many times, they disguise the number they are calling from so it appears to be the IRS or another agency calling, and they may threaten arrest, deportation, or license revocation.
To protect yourself, realize that the IRS will NEVER call to demand immediate payment, call about taxes owed without first having mailed a bill, call to demand payment without the opportunity to question or appeal, require use of a specific payment method, such as a prepaid debit card or wire transfer, ask for credit or debit card numbers over the phone, or threaten to bring in local police or other law enforcement to arrest a taxpayer for not paying. - Phishing – Also high on the list is "phishing," in which taxpayers get unsolicited emails seeking financial or personal information. A taxpayer who receives a suspicious email should send it to phishing@irs.gov. "The IRS won't send you an email about a bill or refund out of the blue," said IRS Commissioner John Koskinen.
- Return preparer fraud – This involves "dishonest preparers who set up shop each filing season to perpetrate refund fraud, identity theft and other scams". The IRS cautions to be wary of "unscrupulous preparers who prey on unsuspecting taxpayers with outlandish promises of overly large refunds." Also to be avoided, it says, are preparers who base their fees on a percentage of the refund.
- Hiding money/income offshore - Hiding money or income offshore, which is a major focus of IRS enforcement efforts, is the next tax scam the IRS mentioned, and is an area on which the IRS focusing. While there are legitimate reasons that taxpayers have foreign accounts, these accounts trigger special reporting requirements.
- Inflated refund claims - Closely related to return preparer fraud is inflated refund claims. "Be wary of tax preparers that tout outlandish refunds based on federal benefits or tax credits you've never heard of or weren't eligible to claim in the past," Koskinen says. Inflated refund claims often involve claims for tax credits that taxpayers are not entitled to, such as education credits or the earned income tax credit (EITC).
- Fake charities – This scam preys on the generous hearts of Americans. The IRS cautions to check the "Exempt Organizations Select Check" on the IRS's website about the legitimacy of charities. Legitimate charities are willing to give donors their employer identification numbers, which can then be used to check whether the charities are qualified on the IRS website.
- Falsely padding deductions – New to the list this year is deceitfully inflating deductions or expenses on the return to pay less tax or receive a bigger refund. Doing this may subject you to substantial penalties and, in some cases, criminal prosecution.
- Excessive claims for business credits – This item expands on last year's "excessive claims for fuel credits". This scam involves two specific false claims for credits: fraudulent claims for refunds of fuel excise tax and bogus claims for the research tax credit.
- Falsifying income to claim tax credits – This scam involves falsely claiming higher earned income to qualify for the EITC, which is a refundable credit. Unscrupulous preparers often do this to get taxpayers larger refunds than they are entitled to. Even when taxpayers are unaware of these false claims, they are still responsible for what is on their tax return.
- Abusive tax shelters - Participating in abusive tax shelters, defined as schemes using multiple flowthrough entities to evade taxes, is next. These use limited liability companies, limited liability partnerships, international entities, foreign accounts, offshore credit or debit cards, or multilayer transactions to conceal who owns the income or assets, as well as trusts and captive insurance companies.
- Frivolous tax arguments – Lastly, are frivolous tax arguments, which the IRS warns taxpayers not to be talked into. "Taxpayers should avoid unscrupulous promoters of false tax-avoidance arguments because taxpayers end up paying what they owe plus potential penalties and interest mandated by law," Koskinen said. There is an automatic $5,000 penalty for frivolous tax positions.
Being aware of the above scams can help you avoid much difficulty and angst later on. While not a complete list, these certainly are the most common you need to know about.
