IRS Highlights Year-Round Risk of Tax Scams

Each year the IRS identifies 12 tax scams known as the Dirty Dozen. This summer, the IRS is focusing on five of the 12 frauds, noting that tax scams can occur at any time during the year, including the summer. Here are the five tax scams receiving special emphasis:

• Phishing. Scam artists try to trick people into revealing personal or financial information by the use of e-mails, tweets, and phony websites. The message delivered to the potential victim is that they are owed a tax refund, and that personal information is required to receive it.
  Since the IRS NEVER initiates unsolicited electronic contact with taxpayers about tax issues, the messages are ALWAYS fake. If you do provide information in response to the e-mail, you are almost certain to have a serious problem. The phisher can steal your identity, access bank accounts, run up credit card charges, or apply for loans in your name.
  Contact the IRS at phishing@irs.gov if you are the subject of a phishing expedition, and never follow an e-mail link that purports to take you to the IRS website. It will be a copycat site, and by visiting the site, they will have the opportunity to gain even more information directly from your computer.
• Return Preparer Fraud. Unscrupulous tax return preparers may skim part of your refund, charge inflated fees, or attempt to attract clients by promising refunds that are too good to be true.
• Hiding Income Offshore. Don't let anyone talk you into trying to avoid or evade income tax by hiding income in offshore banks and brokerage accounts. The same is true of offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans. As a taxpayer, you're entitled to minimize your taxes to the extent that you can, but choosing to use an offshore mechanism to hide income is illegal and carries stiff penalties.
• Abuse of Charitable Organizations and Deductions. Before you give money to any organization claiming to be a charity, check it out. Tax scammers misuse tax-exempt organizations to improperly shield income or assets from taxes. Another type of scam involves a purported charity telling the donor that the items can be bought back later at a price that you set.
• Frivolous Arguments. Don't let anyone convince you to make unreasonable and outlandish claims to avoid paying the taxes you rightly owe. Visit the IRS web site to see a list of frivolous legal positions that have already been rejected by the courts.

The seven other items on the 2010 Dirty Dozen tax scam list are:

• Filing False or Misleading Forms. Some scammers fabricate an information return and falsely claim the corresponding amount as withholding in order to obtain a refund. The information return claims false withholding credits to legitimize erroneous refund claims.
• Nontaxable Social Security Benefits with Exaggerated Withholding Credit. Taxpayers falsely report nontaxable Social Security benefits with excessive withholding, thereby reporting no income.
• Abusive Retirement Plans. The IRS is looking for transactions that taxpayers use to avoid the limits on contributions to IRAs, as well as transactions that are not properly reported as early distributions. Stay away from advisers who recommend that you shift appreciated assets at less than fair market value into IRAs or companies owned by your IRAs to circumvent annual contribution limits.
• Disguised Corporate Ownership. Corporations and business entities sometimes are formed to disguise the ownership of the business or to conceal financial activity. The IRS is working with state authorities to identify such entities.
• Zero Wages. Filing a phony wage- or income-related information return to replace a legitimate information return is an illegal method to lower the amount of taxes owed.
• Misuse of Trusts. Unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are legitimate uses for a trust, promoters who promise reduced income subject to tax, deductions for personal expenses, and reduced estate or gift taxes rarely deliver the promised tax benefits.
• Fuel Tax Credit Scams. Some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable.
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Finally, remember that the Dirty Dozen list cuts both ways. While it helps you avoid getting scammed, it also serves as a reminder that you shouldn't try these scams yourself.

Posted July 30, 2010.