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Compiled annually by the IRS,
the "Dirty Dozen" is a list of common scams taxpayers may
encounter. While many of these scams peak during the tax
filing season, they may be encountered at any time during the
year. Here is this year's list:
Scam artists continue to victimize taxpayers during filing
season using a steady onslaught of new and evolving phishing
schemes. Email phishing schemes target payroll professionals,
human resources personnel, schools as well as individual
taxpayers and even tax professionals, deploying various types
of phishing emails in an attempt to access client data.
Thieves may use this data to impersonate taxpayers and file
fraudulent tax returns for refunds.
In the most recent scam, thousands of taxpayers have been
victimized by an unusual scheme that involves their own bank
accounts. After stealing client data from tax professionals
and filing fraudulent tax returns, the criminals use
taxpayers' real bank accounts to direct deposit refunds.
Thieves are then using various tactics to reclaim the refund
from the taxpayers, including falsely claiming to be from a
collection agency or representing the IRS.
Fake emails and websites also can infect a taxpayer's computer
with malware without the user knowing it. The malware gives
the criminal access to the device, enabling them to access all
sensitive files or even track keyboard strokes, exposing login
2. Phone Scams
Aggressive and threatening phone calls by criminals
impersonating IRS agents remain a major threat to taxpayers.
Many phone scams use threats to intimidate and bully a victim
into paying. They may even threaten to arrest, deport or
revoke the license of their victim if they don't get the
money. Since October 2013, the Treasury Inspector General for
Tax Administration (TIGTA) reports they have become aware of
over 12,716 victims who have collectively paid over $63
million as a result of phone scams.
Con artists claiming to be IRS officials call unsuspecting
taxpayers and demand they pay a bogus tax bill. Scammers often
alter caller ID numbers to make it look like the IRS or
another agency is calling. The callers use IRS titles and fake
badge numbers to appear legitimate. They may use the victim's
name, address and other personal information to make the call
sound official. They convince the victim to send cash, usually
through a wire transfer or a prepaid debit card or gift card.
They may also leave "urgent" callback requests through phone "robocalls,"
or send a phishing email (see above for more information about
3. Identity Theft
Tax-related identity theft occurs when someone uses your
stolen Social Security number to file a tax return claiming a
fraudulent refund. While the IRS has made significant progress
in deterring tax-related identity theft (from 2016 to 2017
identity theft decreased by 40 percent), criminals continue to
devise creative ways to steal even more in-depth personal
information to impersonate taxpayers. As such, taxpayers and
tax professionals must remain vigilant to the various scams
and schemes used for data thefts. Business filers should also
be aware that cybercriminals file fraudulent Forms 1120 using
stolen business identities as well.
Always use security software with firewall and anti-virus
protection and make sure security software is always turned on
and set to automatically update. Encrypt sensitive files such
as tax records stored on the computer. Use strong passwords.
Do not click on links or download attachments from unknown or
suspicious emails. Protect personal data. Treat personal
information like cash; don't leave it lying around. Don't
routinely carry a Social Security card, and make sure tax
records are secure.
4. Tax Return Preparer
About 60 percent of taxpayers use tax professionals to prepare
their returns. The vast majority of tax professionals provide
honest, high-quality service, but there are some dishonest tax
preparers who set up shop each filing season. Well-intentioned
taxpayers can be misled by tax preparers who don't understand
taxes or who mislead people into taking credits or deductions
they aren't entitled to in order to increase their fee. Avoid
tax preparers who base fees on a percentage of their client's
refund or boast bigger refunds than their competition.
Illegal scams can lead to significant penalties and interest
and possible criminal prosecution. IRS Criminal Investigation
works closely with the Department of Justice (DOJ) to shutdown
scams and prosecute the criminals behind them.
5. Fake Charities
Taxpayers should be aware that phony charities use names or
websites that sound or look like those of respected,
legitimate organizations. For instance, following major
disasters, it's common for scam artists to impersonate
charities to get money or private information from
well-intentioned taxpayers. Scam artists use a variety of
tactics including contacting 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 also attempt to get
personal financial information or Social Security numbers that
can be used to steal the victims' identities or financial
6. Inflated Refund Claims
Taxpayers should be on the lookout for unscrupulous tax return
preparers pushing inflated tax refund claims. Scam artists
routinely pose as tax preparers during tax time, luring
victims in by promising large federal tax refunds or refunds
that people never dreamed they were due in the first place.
They might, for example, promise inflated refunds based on
fictitious Social Security benefits and false claims for
education credits, the Earned Income Tax Credit (EITC), the
Additional Child Tax Credit (ACTC) or the American Opportunity
Tax Credit (AOTC), among others. They may also file a false
return in their client's name, and the client never knows that
a refund was paid.
Filing a phony information return, such as a Form 1099 or W-2,
is an illegal way to lower the amount of taxes owed. The use
of self-prepared, "corrected" or otherwise bogus forms that
improperly report taxable income as zero is illegal. So is an
attempt to submit a statement rebutting wages and taxes
reported by a third-party payer to the IRS. In some cases,
individuals have made refund claims based on the bogus theory
that the federal government maintains secret accounts for U.S.
citizens and that taxpayers can gain access to the accounts by
issuing 1099-OID forms to the IRS.
Because taxpayers are legally responsible for what is on their
returns (even if it was prepared by someone else), those who
buy into such schemes can end up being penalized for filing
false claims or receiving fraudulent refunds.
7. Excessive Claims for
Improper claims for business credits such as the fuel tax
credit and the research credit are also on the IRS "Dirty
Dozen" list this year. The fuel tax credit is generally
limited to off-highway business use or use in farming.
Consequently, the credit is not available to most taxpayers.
Still, the IRS routinely finds unscrupulous tax preparers who
have enticed sizable groups of taxpayers to erroneously claim
the credit to inflate their refunds.
Fraud involving the fuel tax credit is considered a frivolous
tax claim and can result in a penalty of $5,000. Improper
claims for the fuel tax credit generally come in two forms. An
individual or business may make an erroneous claim on their
otherwise legitimate tax return. It is also possible for an
identity thief to claim the credit as part of a broader
Improper claims for the research credit generally involve a
failure to participate in or substantiate qualified research
activities and/or a failure to satisfy the requirements
related to qualified research expenses. In addition, qualified
research expenses include only in-house wages and supply
expenses and 65 percent (typically) of payments to
contractors. Qualified research expenses do not include
expenses without a proven nexus between the claimed expenses
and the qualified research activity.
To qualify for the credit, a taxpayer's research activities
must, among other things, involve a process of experimentation
using science with a goal of improving a product or process
the taxpayer uses in its business or holds for sale or lease.
Certain activities specifically excluded from the credit
including research after commercial production, adaptation of
an existing business product or process, foreign research and
research funded by the customer. Qualified activities also do
not include activities where there is no uncertainty about the
taxpayer's method or capability to achieve a desired result.
8. Falsely Padding
Deductions on Tax Returns
The vast majority of taxpayers file honest and accurate tax
returns on time every year. However, each year some taxpayers
fail to resist the temptation of fudging their information.
That's why falsely claiming deductions, expenses or credits on
tax returns is on the "Dirty Dozen" tax scams list for the
2018 filing season. The IRS warns taxpayers that they should
think twice before overstating deductions such as charitable
contributions, padding their claimed business expenses or
including credits that they are not entitled to receive.
Avoid the temptation of falsely inflating deductions or
expenses on your return to underpay what you owe and possibly
receive larger refunds. Taxpayers may be subject to criminal
prosecution and be brought to trial for actions such as
willful failure to file a return, supply information, or pay
any tax due; fraud and false statements, preparing and filing
a fraudulent return and identity theft.
9. Falsifying Income to
This scam involves inflating or including income on a tax
return that was never earned, either as wages or as
self-employment income, usually in order to maximize
refundable credits. Falsely claiming an expense or deduction
you did not pay, claiming income you did not earn could have
serious repercussions. Con artists often argue that the proper
way to redeem or draw on a fictitious "held-aside" account is
to use some form of made-up financial instrument, such as a
bonded promissory note, that purports to be a debt payment
method for credit cards or mortgage debt. Scammers provide
fraudulent Form(s) 1099-MISC that appear to be issued by a
large bank, loan service and/or mortgage company with which
the taxpayer may have had a prior relationship.
Well-intentioned individual taxpayers who don't understand
taxes or unscrupulous return preparers who mislead people into
taking credits or deductions they aren't entitled to do this
to secure larger refundable credits (e.g., the Earned Income
Tax Credit) to charge a higher fee; however, it can have
serious repercussions. Taxpayers can face a large bill to
repay the erroneous refunds, including interest and penalties.
In some cases, they may even face criminal prosecution.
Remember: Taxpayers are legally responsible for what's on
their tax return whether it is prepared using tax software or
a tax professional.
10. Frivolous Tax
Taxpayers are also warned against using frivolous tax
arguments to avoid paying their taxes. Examples include
contentions that taxpayers can refuse to pay taxes on
religious or moral grounds by invoking the First Amendment or
that the only "employees" subject to federal income tax are
employees of the federal government, and that only
foreign-source income is taxable.
Promoters of frivolous schemes encourage taxpayers to make
unreasonable and outlandish claims to avoid paying the taxes
they owe. These arguments are wrong and have been thrown out
of court. While taxpayers have the right to contest their tax
liabilities in court, no one has the right to disobey the law
or disregard their responsibility to pay taxes. The penalty
for filing a frivolous tax return is $5,000.
11. Abusive Tax Shelters
Abusive tax shelters, particularly those involving
micro-captive insurance shelters, are on the list again for
2018. Phony tax shelters and structures to avoid paying taxes
continues to be a problem and taxpayers should steer clear of
these types of schemes as they can end up costing taxpayers
more in back taxes, penalties, and interest than they saved in
the first place.
Another tax shelter abuse involving a legitimate tax structure
involves certain small or "micro" captive insurance companies.
In the abusive structure, unscrupulous promoters, accountants,
or wealth planners persuade the owners of closely held
entities to participate in these schemes. The promoters assist
the owners to create captive insurance companies onshore or
offshore and cause the creation and sale of the captive
"insurance" policies to the closely held entities. The
promoters manage the entities' captive insurance companies for
substantial fees, assisting taxpayers unsophisticated in
insurance, to continue the charade from year to year.
For example, coverages may insure implausible risks, fail to
match genuine business needs or duplicate the taxpayer's
commercial coverages. Premium amounts may be unsupported by
underwriting or actuarial analysis may be geared to a desired
deduction amount or may be significantly higher than premiums
for comparable commercial coverage. Policies may contain
vague, ambiguous or deceptive terms and otherwise, fail to
meet industry or regulatory standards. Claims' administrative
processes may be insufficient or altogether absent. Insureds
may fail to file claims that are seemingly covered by the
Micro-captives may invest in illiquid or speculative assets or
loans or otherwise transfer capital to or for the benefit of
the insured, the captive's owners or other related persons or
entities. Captives may also be formed to advance
intergenerational wealth transfer objectives and avoid estate
and gift taxes. Promoters, reinsurers and captive insurance
managers may share common ownership interests that result in
conflicts of interest.
The bottom line: Don't use abusive tax structures to avoid
paying taxes. The IRS is committed to stopping complex tax
avoidance schemes and the people who create and sell them. The
vast majority of taxpayers pay their fair share, and everyone
should be on the lookout for people peddling tax shelters that
sound too good to be true. When in doubt, seek an independent
opinion if offered complex products.
12. Unreported Offshore
Through the years, offshore accounts have been used to lure
taxpayers into scams and schemes. Numerous individuals have
been identified as evading U.S. taxes by hiding income in
offshore banks, brokerage accounts or nominee entities and
then using debit cards, credit cards or wire transfers to
access the funds. Others have employed foreign trusts,
employee-leasing schemes, private annuities or insurance plans
for the same purpose.
While there are legitimate reasons for maintaining financial
accounts abroad, there are reporting requirements that need to
be fulfilled. U.S. taxpayers who maintain such accounts and
who do not comply with reporting requirements are breaking the
law and risk significant penalties and fines, as well as the
possibility of criminal prosecution.
Since 2009, tens of thousands of individuals have come forward
to voluntarily disclose their foreign financial accounts
through the Offshore Voluntary Disclosure Program (OVDP),
taking advantage of special opportunities to comply with the
U.S. tax system and resolve their tax obligations. The IRS
recently announced that this voluntary program will end on
September 28, 2018.
If you think you've been a victim of a tax scam, please
contact the office immediately.
Don't hesitate to call us if you need help or
want to get started on tax planning for 2018!
If you have comments or questions on the information in these
articles, as usual feel free to call our offices.
Thanks! Julie Jeffers
Feel free to give us a call if
you have a question about these topics or issues or if you
need help or want to
get started on tax planning for the rest of 2018! If you have comments on the information in these
articles, feel free to call our offices.