Kelly Phillips Erb, Contributor, Forbes
Each year, the Internal Revenue Service (IRS) issues a list of common tax schemes and scams they call the “Dirty Dozen.” Taxpayers can fall victim to these scams at any time, but they tend to peak during tax filing season. The keys to avoiding becoming a victim? Educate yourself about what’s out there and take steps to protect yourself and your tax data.
To help you get started, here’s a summary of this year’s “Dirty Dozen”:
1. Phishing. Phishing is a scam where criminals attempt to steal your financial information through the use of email or a fake website. In many cases, the bogus emails ask for specific personal information or try to get you to click on a link to install spyware or other malware on your computer. Remember that the IRS doesn’t initiate contact with taxpayers by email to request personal or financial information, so don’t click on or respond to these kinds of emails. If you receive an unsolicited email that appears to be from the IRS, you can report it by forwarding it to firstname.lastname@example.org. Also be careful with emails purporting to be from individuals or companies asking for personal or payroll information. When in doubt, assume it’s a scam.
2. Phone Scams. Callers posing as agents from the IRS attempting to collect bogus tax debts topped the list of the most reported scams of 2016, according to the Better Business Bureau. Those IRS phone scams accounted for one in four reported scams last year. Fortunately, following a number of high-profile arrests, those IRS-related phone scams appear to be on their way down – but not out. Typically, in the scheme, callers posing as IRS representatives say the victims owe money and then threaten arrest if the amount is not paid immediately. Scammers will use fake names and IRS badge numbers and “spoof” or imitate the IRS toll-free number on caller ID to make it appear that it’s the IRS calling. If you get a phone call from someone claiming to be from the IRS and you’re not sure, and you have a legitimate tax issue outstanding, call the IRS directly at 1-800-829-1040. If you get a phone call from someone claiming to be from the IRS and you know you don’t owe taxes, report the incident to the Treasury Inspector General for Tax Administration (TIGTA) at 1-800-366-4484.
3. Identity Theft. Identity theft, when someone uses your personal information such as your name, Social Security number (SSN) or other identifying information, without your permission, is often used by scammers to fraudulently file a tax return and claim a refund. The IRS has new protections for taxpayers this year including increased screenings, delayed refunds and verification codes on some forms W-2. If you believe you are at risk of identity theft due to lost or stolen personal information, contact the IRS Identity Protection Specialized Unit at 1-800-908-4490 or visit the IRS’ special identity protection page.
4. Return Preparer Fraud. Nearly two-thirds of taxpayers rely on professional tax preparers to assist them with their returns. Most tax preparers are good people, but some unscrupulous preparers may try to encourage taxpayers to claim improper credits, deductions or exemptions in hopes of boosting refunds. Use care when choosing a preparer and remember that taxpayers should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs) – you can review the IRS list of preparers with PTINs here.
5. Fake Charities. Watch out for groups masquerading as charitable organizations to attract donations from unsuspecting contributors. Bona fide charitable organizations have, as their mission, to benefit the public. Fake charities take advantage of taxpayers’ good nature to steal your money and potentially, your identity. To avoid being taken advantage of, donate to recognized charities using check or credit card where possible. Remember that you don’t need to give out personal information, like your Social Security number, for the purpose of obtaining a receipt for your charitable donation. The best documentation on your end is a canceled check or credit card receipt so donate using those means on secure sites whenever possible.
6. Inflated Refund Claims. With more than 50 percent of taxpayers expected to receive a tax refund, it’s no surprise that everyone wants their share – and some, even more than their share. This makes it appealing for scam artists to promise free money in the form of inflated refunds. There are a number of variations on these refund scams, but a number tend to be based on refundable tax credits like the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) – that’s why Congress delayed issuing tax refunds tied to those credits this year. If you make a false claim or receive a fraudulent refund, you can be subject to a penalty and potentially, jail time. Also a risk? The IRS has received complaints of scam victims who lost their federal benefits, such as Social Security benefits, certain veteran’s benefits or low-income housing benefits after filing tax returns with the IRS that provided false income amounts.
7. Excessive Claims for Business Credits. There’s no law that says you have to pay more in tax than you have to – but you do have to follow the rules. Claiming excessive business credits to illegally reduce your taxes is improper. Two schemes, in particular, have attracted the attention of the IRS: fraud involving the fuel tax credit and the research credit. Unsupported claims for tax credits may subject taxpayers to penalties and interest.
8. Falsely Padding Deductions on Returns. Taxpayers are entitled to claim legitimate deductions on their tax returns. Taxpayers are often tempted or enticed to claim “just a little bit more” for charitable deductions or business miles that they did not travel. However, overstating deductions – even just a little – is improper and can lead to significant civil penalties and criminal prosecution. The IRS warns that you should “think twice before overstating deductions such as charitable contributions and business expenses or improperly claiming credits such as the Earned Income Tax Credit or Child Tax Credit.”
9. Falsifying Income to Claim Credits. It’s usual to think of taxpayers hiding income to avoid tax, but there’s another scheme involving misrepresenting income: inflating or including income on a tax return that was never earned, either as wages or as self-employment income, to maximize credits, especially refundable credits. Refundable tax credits typically require earned income to qualify. This provides some taxpayers (and unscrupulous preparers) with an incentive to lie about income to claim the credit. Taxpayers who engage in this behavior not only have to pay back the erroneous refunds, including interest and penalties, but may face criminal prosecution. The bottom line? Don’t invent income and file the most accurate tax return possible.
10. Abusive Tax Shelters. Abusive tax shelters don’t have to be enormous multi-million dollar tax schemes: they can involve simple trust arrangements, offshore tax schemes and the use of multiple pass-through companies like Limited Liability Companies (LLCs) to hide ownership of the taxable income and/or assets. Remember that when something feels “too good to be true,” it probably is: you generally can’t legally avoid taxation by creating multiple layers of companies or trusts or by manipulating the ownership of assets. Legitimate tax planning is not the same as tax evasion. Don’t get sucked into schemes promoted by advisors who promise you that you can permanently avoid taxation by buying their shelters and/products. When in doubt, seek an independent opinion not tied to a particular arrangement or product.
11. Frivolous Tax Arguments. The IRS warns against using common frivolous tax arguments made by those who oppose compliance with federal tax laws. Examples of frivolous tax arguments include contentions that taxpayers can refuse to pay taxes on religious or moral grounds by invoking the First Amendment; that the only “employees” subject to federal income tax are employees of the federal government; and that only foreign-source income is taxable. The penalty for taking one of these positions on a tax return is $5,000; additional penalties may also apply, including criminal prosecution.
12. Offshore Tax Avoidance. It is not illegal to have cash, brokerage accounts or other investments in foreign countries. It is, however, illegal to use those accounts to evade U.S. taxes by hiding that income. There are significant reporting requirements for offshore assets, including FBAR (Report of Foreign Bank and Financial Accounts) filings. Taxpayers who do not properly report and disclose those accounts are breaking the law and could face civil and criminal penalties and fines. Pay attention to reporting requirements, and if you need to make a disclosure because you failed to report in the past, you may want to consider the Offshore Voluntary Disclosure Program (OVDP). Qualifying taxpayers who come in through the program can catch up on filing and payment requirements and avoid heavy fines and criminal prosecution.
The IRS has a webpage dedicated to these scams where you can find summaries as well as links to more information.