IRS Announces Annual List of “Dirty Dozen” Tax Scams

With the 2014 tax filing season in full swing, the IRS announced today its annual listing of what it calls the “Dirty Dozen” tax scams.  The Service publishes this list annually in order to remind taxpayers to use caution during tax season to protect themselves against a wide range of schemes ranging from identity theft to return preparer fraud.  “Taxpayers should be on the lookout for tax scams using the IRS name,” said IRS Commissioner John Koskinen. “These schemes jump every year at tax time. Scams can be sophisticated and take many different forms.  We urge people to protect themselves and use caution when viewing e-mails, receiving telephone calls or getting advice on tax issues.”

The following are the Dirty Dozen tax scams for 2014:

1.  Identity Theft.  Tax fraud through the use of identity theft tops this year’s Dirty Dozen list, just as it did in 2013.  According to the IRS, identity theft occurs when someone uses your personal information, such as your name, Social Security number or other identifying information, without your permission, to commit fraud or other crimes.  In many cases, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.  The IRS has a special section on IRS.gov dedicated to identity theft issues, including YouTube videos, tips for taxpayers and an assistance guide.  For victims, the information includes how to contact the IRS Identity Protection Specialized Unit.  For other taxpayers, there are tips on how taxpayers can protect themselves against identity theft.

2.  Pervasive Telephone Scams.  According to the IRS, there has been a recent increase in local phone scams across the country, with callers pretending to be from the IRS in hopes of stealing money or identities from victims.  These phone scams include many variations, ranging from instances from where callers say the victims owe money or are entitled to a huge refund.  Some calls can threaten arrest and threaten a driver’s license revocation.  Sometimes these calls are paired with follow-up calls from people saying they are from the local police department or the state motor vehicle department.

3.  Phishing.  Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information.  Armed with this information, a criminal can commit identity theft or financial theft.  Note that the IRS does not initiate contact with taxpayers by email to request personal or financial information.

4.  False Promises of “Free Money” from Inflated Refunds.  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.

5.  Return Preparer Fraud.  According to the IRS, about 60 percent of taxpayers will use tax professionals this year to prepare their tax returns.  Most return preparers provide honest service to their clients.  But, some unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.  We have previously posted (see here and here) on the Service’s recent aggressive enforcement efforts to shut down fraudulent return preparers.

6.  Hiding Income Offshore.  Over the years, 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.  The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice (DOJ) to prosecute tax evasion cases.

Since 2009, tens of thousands of individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years (namely, FATCA), hiding income offshore is increasingly more difficult.  The IRS has collected billions of dollars in back taxes, interest and penalties so far from people who participated in offshore voluntary disclosure programs since 2009.

7.  Impersonation of Charitable Organizations.  Another long-standing type of abuse or fraud is scams that occur in the wake of significant natural disasters.  Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers.  Scam artists can 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.

8.  False Income, Expenses, or Exemptions.  Another scam involves inflating or including income on a tax return that was never earned, either as wages or as self-employment income in order to maximize refundable credits.  Additionally, some taxpayers are filing excessive claims for the fuel tax credit.  Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit.  But other individuals have claimed the tax credit although they were not eligible.  Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.

9.  Frivolous Arguments.  Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe.  The IRS has a list of frivolous tax arguments that taxpayers should avoid.  Those who promote or adopt frivolous positions risk a variety of penalties.  For example, taxpayers could be responsible for an accuracy-related penalty, a civil fraud penalty, an erroneous refund claim penalty, or a failure to file penalty.  The Tax Court may also impose a penalty against taxpayers who make frivolous arguments in court.  Taxpayers who rely on frivolous arguments and schemes may also face criminal prosecution for attempting to evade or defeat tax.  Similarly, taxpayers may be convicted of a felony for willfully making and signing under penalties of perjury any return, statement, or other document that the person does not believe to be true and correct as to every material matter.  Persons who promote frivolous arguments and those who assist taxpayers in claiming tax benefits based on frivolous arguments may be prosecuted for a criminal felony.

10.  Falsely Claiming Zero Wages or Using False Form 1099.  Filing a phony information return is an illegal way to lower the amount of taxes an individual owes.  Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero.  The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.  Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation.  Filing this type of return may result in a $5,000 penalty.

11.  Abusive Tax Structures.  Abusive tax schemes have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions.  IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax schemes. CI’s primary focus is on the identification and investigation of the tax scheme promoters as well as those who play a substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax scheme (e.g., accountants, lawyers).  Secondarily, but equally important, is the investigation of investors who knowingly participate in abusive tax schemes.

The Abusive Tax Schemes program encompasses violations of the Internal Revenue Code and related statutes where multiple flow-through entities are used as an integral part of the taxpayer’s scheme to evade taxes.  These schemes are characterized by the use of Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and other similar instruments.  The schemes are usually complex involving multi-layer transactions for the purpose of concealing the true nature and ownership of the taxable income and/or assets.

12.  Misuse of Trusts.  Trusts also commonly show up in abusive tax structures.  These transactions promise reduced taxable income, inflated deductions for personal expenses, the reduction or elimination of self-employment taxes and reduced estate or gift transfer taxes.  These transactions commonly arise when taxpayers are transferring wealth from one generation to another.  Questionable trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.

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