By Kay Bell for Bankrate.com
Tax season is prime tax scam season. As the April filing deadline nears, criminals prey upon people’s fears of making a tax return mistake or appeal to their desire to get a bigger refund.
Every year, the Internal Revenue Service issues its list of the dirty dozen worst tax scams. They range from improper application of real-but-arcane tax laws to downright false claims, along with perennial attempts to get individuals to provide personal information that can be used to steal identities.
The scams appear online, by email and in person. In some cases, taxpayers can’t even trust their tax preparers.
Adding injury to insult, tax scam victims and perpetrators also could find themselves in real trouble with the IRS. After the tax con artist has compromised your personal data and taken some, if not all, of your tax refund, you could face significant penalties and interest for not filing a proper tax return or not paying what you legally owe.
Check out this year’s top 12 tax tricks, so you won’t become another tax scam victim. We count them down, ending up at the No. 1 dirtiest of the dozen.
12. Misuse of trusts
Trusts can be valuable legal arrangements to deal with many complex family, financial and tax issues. However, trusts designed solely to hide assets from the IRS are illegal.
But year after year, folks fall prey to unscrupulous promoters who have convinced them to transfer their assets into improperly designed trusts. Recently, the IRS says it has seen an increase in the inappropriate use of private annuity trusts and foreign trusts.
Beware of a trust that promises to reduce the amount of income subject to tax, offers deductions for personal expenses or claims to lower estate or gift taxes. Such trusts rarely deliver the advertised tax benefits. Rather, they are used primarily as a way to hide assets from creditors, including the IRS, and avoid legitimate tax liability.
Trusts can be complicated, so don’t take the word of a stranger offering to set up one that will reduce your tax bill. Find an attorney or other trained tax professional who can help you establish a proper, legal trust.
11. Abusive tax structures
This is a generally inclusive category for good reason. These types of tax schemes encompass multiple flow-through entities.
Basically, says the IRS, the tax avoidance involves various business arrangements — limited liability companies, limited liability partnerships and international business companies are among the most common — that utilize foreign financial accounts, offshore credit and debit cards and other similar instruments. With these tools, the perpetrators take advantage of multi-layer financial transactions to hide the real ownership of the taxable income or assets.
Such schemes, which rank No. 11 in 2014, are helped by the financial secrecy laws of some foreign jurisdictions and the availability of credit and debit cards issued from offshore financial institutions.
The IRS Criminal Investigation unit targets not only the criminals who set up these elaborate schemes, but also the individuals who knowingly participate in abusive tax schemes.
10. Falsely claiming zero wages
The IRS gets copies of W-2 forms that businesses send to employees. In cases of contractors, employers issue 1099 forms, again to both the workers and the IRS.
When a business doesn’t issue a W-2, a taxpayer can file using Form 4852, Substitute Form W-2. And mistakes on 1099s can be fixed by the issuer sending a corrected form.
But some con artists try to get taxpayers to use doctored income statements to reduce their wages to nothing. To validate such false income filings, the zero-income fraudsters include explanations on the fake forms that cite statutory language on the definition of wages or claim a company won’t issue a corrected W-2 for fear of IRS retaliation.
These false claims might slow down IRS detection as it double-checks its copies of your real earnings statements, but it won’t stop the tax agency from eventually finding the fraud and coming after you for payment of your proper tax bill. When that happens, in addition to owing your real tax amount, you also could face a $5,000 penalty.
9. Frivolous arguments
The IRS refers to various claims to avoid filing and paying taxes as “frivolous arguments.” A better name is “jailbait.”
A popular claim is that return filing is voluntary. It’s not. In fact, the IRS has tougher penalties for not filing than it does for not paying taxes owed.
Then there’s the argument that wages, tips and other compensation received for personal services are not income. Please check the dictionary along with the tax code. Money received via whatever method is income. And it is called an income tax.
Others contend that the United States consists only of the District of Columbia, federal territories and federal enclaves — and only those U.S. citizens must file a return. The states and their residents that receive federal assistance disagree.
These are only a few of the frivolous tax arguments that anti-tax advocates use to encourage taxpayers to avoid filing and paying taxes. The IRS has a 63-page list of them that you should check before falling for these scams.
And if you are still tempted, just remember they didn’t do Wesley Snipes, who served tax evasion time in a federal prison, any good.
8. False income, expenses, exemptions
Most tax cheats report less income than they make, so their tax liability will be less. But in some cases, a taxpayer needs more money to get a tax break’s maximum benefit.
The IRS says it regularly sees fraudulent income inflating by individuals seeking a refundable tax credit, such as the earned income tax credit, for which they otherwise don’t qualify.
Credits prompt such unscrupulous acts because they are better tax breaks than deductions. A deduction lowers taxable income, while a credit lowers the actual tax bill dollar for dollar. Refundable credits, as the name indicates, allows filers who don’t owe tax to get a refund.
Other tax con artists file excessive claims for relatively uncommon tax breaks, such as the fuel tax credit. This is designed to help farmers and similarly situated taxpayers who use fuel for off-highway business purposes.
The key to avoid this eighth most common 2014 tax scam is to accurately report your taxable income and expenses. If you don’t, you could face interest on unpaid taxes, penalties that could be as much as $5,000 and possible criminal prosecution.
7. Bogus charitable organizations
The tax code offers benefits for philanthropic taxpayers. It does not, however, reward those who set up improper nonprofit groups or illegally donate to them.
Unfortunately, when bad things happen, bad people take advantage, tax and otherwise. That’s why when there are significant natural disasters, con artists come out in droves.
They impersonate charities to get money or private information from well-intentioned taxpayers. And they use a variety of tactics.
Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.
They may attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources. Bogus websites may solicit funds for disaster victims.
6. Hidden offshore income
Putting money into a foreign bank account is not illegal. Putting money into a foreign bank account for the sole purpose of hiding it from the IRS is illegal.
These so-called offshore accounts, as well as associated debit cards, credit cards and wire transfers, have cost the U.S. Treasury billions of dollars. So the IRS is continuing its crackdown on individuals it believes are evading U.S. taxes by hiding income outside the United States.
Most foreign account owners must report that money to the IRS. In fact, the tax agency recently instituted a new foreign account reporting document, Form 8938, that some taxpayers must file with their tax returns.
The IRS’ Offshore Voluntary Disclosure Program encourages taxpayers to report their non-U.S. accounts. Since the national amnesties began in 2009, the IRS has collected $5.5 billion (and counting) from people who admitted that they had taxable money in foreign accounts.
For those who insist on keeping their foreign accounts secret, beware. The IRS and Department of Justice investigators are pursuing taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas.
5. Return preparer fraud
The IRS expects around 60 percent of taxpayers to use tax professionals this year to prepare and file their tax returns. In most cases, those tax return preparers provide honest service to their clients.
But, as in any other business, there are unscrupulous tax pros.
Questionable return preparers have been known to skim off their clients’ refunds, charge excessive fees for return preparation services and attract new clients by promising guaranteed or inflated refunds.
Choose your tax pro carefully. Be wary of one who does not have a tax ID number from the IRS. Other warning signs that your tax pro might not be working in your best interest include a requirement that you split the refund to pay his or her preparation fee, refusal to give you a copy of your return, addition of forms to your return that you had not seen before, and the preparer’s reluctance to put his or her signature on the return.
4. ‘Free money’ from inflated refunds
The old saying “There’s no such thing as a free lunch” has an equally true tax adage cousin: There’s no such thing as free money.
But tax con artists who claim they can get filers free money from the IRS based on fictitious Social Security benefits or false tax credit claims find enough gullible victims to get this egregious tax scam onto the 2014 Dirty Dozen list.
The IRS says con artists specializing in these schemes tend to target low-income individuals and the elderly. The scam typically appears as fliers advertising free money from the IRS. They usually are posted in churches, and then the word spreads by unsuspecting and well-intentioned people who want to share the news with friends and family.
The scam perpetrator gets taxpayer hopes up, collects money to file the fake claims and then is long gone by the time victims learn their claims are rejected.
3. Phishing
Phishing scams are always near the top of tax scam lists, and 2014 is no different. These attempts to get hold of taxpayer personal information come in at third worst.
Phishing attempts typically arrive via unsolicited email or a fake website that looks remarkably like the real one. When the targeted victim answers the email or enters in valuable personal and financial information online, the criminal has enough to steal the person’s identity and ruin his or her financial life.
Tax phishers usually pose as an IRS representative. Don’t fall for it. The IRS doesn’t send unsolicited email to taxpayers. Neither does it seek personal information via other electronic avenues, such as text messages and social media channels.
If you get suspicious communications purporting to be from the IRS, ignore them. Then let the tax agency know. It works with federal law enforcement to shut down the bogus websites and track down the criminals who created them.
2. Telephone scams
Telephone tax scams have been around for ages and they return to the Dirty Dozen this year in the number two slot. Phone scams include many variations, but all try to steal taxpayers’ money or identities.
Some scammers tell folks who take the calls that they are entitled to huge refunds; all they need to do is provide some personal information. Other con artists use fear, threatening taxpayers with revocation of their driver’s license or even arrest if their tax situations aren’t cleared up quickly.
New this year, says the IRS, is a sophisticated phone scam aimed at recent immigrants, who are told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. Failure to follow through, say the con artists, could lead to arrest or deportation.
If you get a phone call from someone claiming to be from the IRS and know you do owe taxes, call the IRS toll-free at (800) 829-1040 for help in resolving your payment issue. If you know you don’t owe taxes, call the Treasury Inspector General for Tax Administration at (800) 366-4484 to report the scam.
1. Identity theft
Drum roll, please. The No. 1 worst tax scam this year is identity theft. It’s topped the Dirty Dozen scam list for years.
The IRS says more identity thieves are looking for ways to get their hands on taxpayers’ personal information. Once they do, they typically file a tax return as the unsuspecting taxpayer and claim a fraudulent refund.
The victimized taxpayer often doesn’t realize there’s a problem until he files his return. That’s when the legitimate filer gets an IRS notice informing him that more than one return was filed in his or her name and the refund has been sent to someone else.
To fight growing identity theft concerns, the IRS has expanded a variety of anti-fraud methods, including stepped-up internal reviews to spot false returns before tax refunds are issued. In 2012 alone, the IRS kept more than $20 billion worth of refunds from going to criminals who had tried to claim the money by filing false returns.
The IRS has a special section on IRS.gov dedicated to identity theft issues. If you discover or fear you are a tax ID theft victim, contact the IRS Identity Protection Specialized Unit at (800) 908-4490.
