The US Internal Revenue Service (IRS) has just issued its annual “Dirty Dozen” list of tax scams in order to help US taxpayers avoid being misled. Most of these scams are equally relevant for Israeli tax purposes.

IRS acting commissioner Steven T. Miller said that “the Dirty Dozen list shows that scams come in many forms during filing season. Don’t let a scam artist steal from you or talk you into doing something you will regret later.”

The following are the Dirty Dozen tax scams for 2013:

Identity Theft

Tax fraud through the use of identity theft tops this year’s Dirty Dozen list. Identity theft occurs when someone uses your personal information such as your name, Social Security number (SSN) 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.

During 2012, the IRS prevented the issuance of $20 billion of fraudulent refunds, including those related to identity theft, compared with $14 billion in 2011. It has 3,000 people working on identity theft-related cases and has trained 35,000 employees who work with taxpayers to help with identity theft situations.

Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so it can take action to secure their tax account.

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.

The IRS does not initiate contact with taxpayers by email to request personal or financial information.

Return Preparer Fraud
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.

US taxpayers should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs).

For tips about choosing a preparer, red flags, details on preparer qualifications and information on how and when to make a complaint, visit www.irs.gov/chooseataxpro.

Hiding Income Offshore
 Over the years, numerous individuals have been identified as evading US taxes by hiding income in offshore banks, brokerage accounts or nominee entities, 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.

At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs.

This program will be open for an indefinite period until otherwise announced.

The IRS has collected $5.5 billion so far from people who participated in offshore voluntary disclosure programs since 2009.

‘Free Money’ from the IRS & Tax Scams Involving Social Security
Scammers prey on lowincome individuals with bogus promises of free money. They build false hopes and charge people good money for bad advice including encouraging taxpayers to make fictitious claims for refunds or rebates based on false statements of entitlement to tax credits. For example, some promoters claim they can obtain for their victims, often senior citizens, a tax refund or nonexistent stimulus payment based on the American Opportunity Tax Credit, even if the victim was not enrolled in or paying for college. Con artists also falsely claim that refunds are available even if the victim went to school decades ago. In the end, the victims discover their claims are rejected. Meanwhile, the promoters are long gone.

There are also a number of tax scams involving Social Security. For example, scammers have been known to lure the unsuspecting with promises of non-existent Social Security refunds or rebates.

Impersonation of Charitable Organizations
Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers.

The IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips: To help disaster victims, donate to recognized charities.

Be wary of charities with names that are similar to familiar or nationally known organizations.

Don’t give out personal financial information, such as Social Security numbers or credit card and bank account numbers and passwords, to anyone who solicits a contribution from you. Scam artists may use this information to steal your identity and money.

Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.

False/Inflated Income and Expenses

Including income that was never earned, either as wages or as self-employment income in order to maximize refundable credits is another popular scam.

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.

False Form 1099 Refund Claims

In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return.

Frivolous Arguments
Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe.

These arguments are false and have been thrown out of court.

Falsely Claiming Zero Wages

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.

Disguised Corporate Ownership
Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business.

These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering, and financial crimes. The IRS is working with state authorities to identify these entities and bring the owners into compliance with the law.

Misuse of Trusts
For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are legitimate uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax deductions for personal expenses and reduced estate or gift taxes.

Such 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.

IRS personnel have seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses.

As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement. As always, consult experienced tax advisors in each country at an early stage in specific cases.

What about Israel?
Similar scams exist in Israel. For example, watch out for identity theft – it is a global problem. Israeli residents are taxed on their worldwide income and gains – only new residents or “senior returning residents” (who lived abroad 10 years) are exempt from Israeli tax on foreign source income for 10 years. Charities are only recognized if they are approved under Section 46 of the Israeli Income Tax Ordinance.

Businesses must register for tax purposes immediately upon start-up, keep approved books, issue approved invoices to customers and report monthly as well as annually. A lot of olim suffer late filing penalties because they wrongly assume the compliance rules are the same in Israel as in the old country. Claiming phony expense deductions based on fictitious invoices is highly risky – medium and large businesses in Israel now file detailed online VAT returns listing all their genuine invoices.

Being a phony employee of a manpower company is also risky as such people are now being actively challenged by the National Insurance Institute.

And since 2006 there has been a comprehensive Israeli tax regime for trusts. So professional advice is vital.

The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.

leon@hcat.co

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