IRS releases the ‘Dirty Dozen’ tax scams for 2012

Your Taxes: The following is the Dirty Dozen tax scams from the IRS for 2012.

By LEON HARRIS
March 13, 2012 22:13
fraud, phishing [illustrative]

fraud [illustrative]_370. (photo credit: Thinkstock/Imagebank)

The US Internal Revenue Service (IRS) has just issued its annual “Dirty Dozen” ranking of tax scams.

“Taxpayers should be careful and avoid falling into a trap with the Dirty Dozen,” said IRS Commissioner Doug Shulman. “Scam artists will tempt people in-person, online and by email with misleading promises about lost refunds and free money. Don’t be fooled by these scams.”

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While this article is aimed at US taxpayers, Israelis are not immune from similar scams.

The following is the Dirty Dozen tax scams from the IRS for 2012:

Identity theft

Topping this year’s list Dirty Dozen list is identity theft. In response to growing identitytheft concerns, the IRS is increasingly seeing identity thieves looking for ways to use a legitimate taxpayer’s identity and personal information to file a tax return and claim a fraudulent refund.

An IRS notice informing a taxpayer that more than one return was filed in the taxpayer’s name, or that the taxpayer received wages from an unknown employer, may be the first tip-off the individual receives that he or she has been victimized.



In 2011, the IRS protected more than $1.4 billion of taxpayer funds from getting into the wrong hands due to identity theft.

Anyone who believes his or her personal information has been stolen and used for tax purposes should immediately contact the IRS Identity Protection Specialized Unit. For more information, visit the special identity theft page at www.IRS.gov/identitytheft.

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.

If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.

It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social-media channels.

Return preparer fraud

About 60 percent of US taxpayers will use tax professionals this year to prepare and file their tax returns. Most return preparers provide honest service to their clients. But as in any other business, there are also some who prey on unsuspecting taxpayers.

Questionable return preparers have been known to skim off their clients’ refunds, charge inflated fees for return preparation services and attract new clients by promising guaranteed or inflated refunds.

In 2012, every paid preparer needs to have a Preparer Tax Identification Number (PTIN) and enter it on the returns he or she prepares.

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, employeeleasing 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.

US taxpayers who maintain such accounts and who do not comply with reporting and disclosure requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.

Since 2009, 30,000 individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to bring their money back into the US tax system and resolve their tax obligations.

At the beginning of this year, 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 $3.4b. so far from people who participated in the 2009 offshore program, reflecting closures of about 95% of the cases from the 2009 program. On top of that, the IRS has collected an additional $1b. from up-front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.

‘Free money’ from the IRS and tax scams involving Social Security

Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches around the country. Scammers prey on low-income individuals and the elderly.

There are a number of tax scams involving Social Security. For example, scammers have been known to lure the unsuspecting with promises of nonexistent Social Security refunds or rebates. In another situation, a taxpayer may really be due a credit or refund but uses inflated information to complete the return. Intentional mistakes of this kind can result in a $5,000 penalty.

False or inflated income and expenses

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

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. The IRS has a list of frivolous tax arguments that taxpayers should avoid. 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.

Abuse of charitable organizations and deductions

IRS examiners continue to uncover the intentional abuse of 501(c)(3) organizations, including arrangements that improperly shield income or assets from taxation, and attempts by donors to maintain control over donated assets or the income from donated property.

The IRS is investigating schemes that involve the donation of noncash assets, including situations in which several organizations claim the full value of the same noncash contribution.

Often these donations are highly overvalued, or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor. The Pension Protection Act of 2006 in the US imposed increased penalties for inaccurate appraisals and set new standards for qualified appraisals.

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 and to facilitate money laundering and financial crimes. The IRS is working with state authorities to identify these entities.

Misuse of 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 are used primarily as a means of avoiding incometax liability and hiding assets from creditors, including the IRS.

The IRS concludes that “as with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.”

As always, consult experienced tax advisers in each country at an early stage in specific cases.

leon@hcat.co

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


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