IRS Publishes Annual List of Tax Scams

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The Internal Revenue Service has issued its annual list of tax scams, reminding taxpayers to use caution during tax season to protect themselves.  As you can tell from the lost, tax scams come in many forms.  Don't let a scam artist take advantage of you.  Set forth below is a summary of the IRS list of tax scams prevalent this tax season:

Identity Theft

Tax fraud through the use of identity theft tops this year’s 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.

The IRS has a special section on the IRS.gov website dedicated to identity theft issues.  For victims, the website includes info on how to contact the IRS Identity Protection Specialized Unit.  For other taxpayers, the site includes information on how to protect themselves against 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 the agency can take action to secure their tax account. Taxpayers can call the IRS Identity Protection Specialized Unit at 800-908-4490. More information can be found on the special identity protection page.

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.

The IRS DOES NOT send email requesting personal ort financial information.  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.

Preparer Fraud

A majority 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.

Taxpayers are legally responsible for what’s on their tax return even if it is prepared by someone else.  So it is important to choose carefully when hiring an individual or firm to prepare your return.  The IRS wants to remind all taxpayers that they should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs).  The IRS has created a new web page to assist taxpayers  www.irs.gov/chooseataxpro.

Offshore Accounts

Over the years, some individuals have been identified as evading U.S. 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.  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 to prosecute tax evasion cases.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. 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.  Taxpayers need to be aware that the IRS and DOJ are finding and prosecuting taxpayers in these situations.

“Free Money” from the IRS

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. These schemes promise refunds to people who have little or no income and normally don’t have a tax filing requirement – and are also often spread by word of mouth as unsuspecting and well-intentioned people tell their friends and relatives.

Scammers prey on low income individuals and the elderly and members of church congregations with bogus promises of free money.  In the end, the victims discover their refund claims are rejected. Meanwhile, the promoters are long gone. The IRS warns all taxpayers to remain vigilant.

Bogus Charities

Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists may pretend to operate a bogus charity and 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.

The IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips:

Donate only to recognized charities.
Be wary of charities with names that are similar to familiar or nationally known organizations. Go to the IRS.gov website and use the search feature Select Check, to find the names of legitimate qualified charities.
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.
Don’t give or send cash, use a check or credit card.
Inflated Income or Expenses

Some scam artists are preparing and filing tax returns which include income that was never earned, either as wages or as self-employment income in order to maximize refundable credits.  Overstating income or expenses to create a tax refund can lead to additional tax, penalties and interest.

False Refund Claims

Some of the scams are hard to believe.  In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS. 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.  The IRS warns taxpayers to be careful.  If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.

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. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.

Zero Wage Claims

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, these scammers 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.

Disguised Business 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.

If you want to share a horror story or have any questions about avoiding tax scams, give me a call or email at 937-223-1130 or Jsenney@pselaw.com.

SUMMARY.  If you have a large tax bill coming up, and you don't have the money sitting around to pay the tax bill, consider borrowing the money from your retirement plan.   A plan loan can be a relatively painless way of raising cash without adverse tax consequences.  But the plan loan must be set up correctly and repaid on time.  If you have any questions or want to know more about taking a plan loan from your qualified retirement plan account, please call or email me at 937-223-1130 or Jsenney@pselaw.com.

AND ONE MORE THING.  The American Red Cross is organizing a gala, Putting on the Glitz, as a fundraiser to benefit disaster relief and preparedness in the Miami Valley.  The event will take place Saturday, April 27, 2013 with the theme, Providing "Hope Like a Bridge Over Troubled Water.  As a "model" for the Red Cross gala I need your support to meet my individual fundraising goal.  You can check back on my personal page and track the progress made to reaching my final goal.  Please donate and help show your support for this great cause.