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.
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.”
are the Dirty Dozen tax scams for 2013:
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.
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
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 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
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
US taxpayers should use only preparers who sign the returns they
prepare and enter their IRS Preparer Tax Identification Numbers
For tips about choosing a preparer, red flags, details on
preparer qualifications and information on how and when to make a complaint,
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
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
This program will be open for an indefinite period until
The IRS has collected $5.5 billion so far from
people who participated in offshore voluntary disclosure programs since
‘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
Impersonation of Charitable Organizations
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.
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
income that was never earned, either as wages or as self-employment income in
order to maximize refundable credits is another popular
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.
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.
Promoters of frivolous schemes encourage taxpayers to make
unreasonable and outlandish claims to avoid paying the taxes they
These arguments are false and have been thrown out of
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
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
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.
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
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
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
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
The writer is a certified public accountant and tax specialist at
Harris Consulting & Tax Ltd.