The Top Twelve Tax Scams – Part 1

Every year the Internal Revenue Service (IRS) lists their “Dirty Dozen” of tax scams to warn taxpayers so that they can protect themselves. Some of these scams occur during tax season and some during the rest of the year. Some are scams to get taxpayers’ identity; some offer fees for advice to lower taxes; and others are intentional by taxpayers.

“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, on-line and by e-mail with misleading promises about lost refunds and free money. Don’t be fooled by these scams.”

The top six

The top six scams will be discussed here and the remaining six in a second blog article. The top six scams are:  identity theft, phishing, return preparer fraud, hiding income offshore, “free money” and Social Security scams, and false/inflated income and expenses.

1. Identity theft – This is the number one scam. Thieves use a taxpayer’s identity and personal information to file a tax return and claim a fraudulent refund. One sign that you may be a victim is a notice from the IRS that you have filed more than one return.  Another is that you have received wages from an unknown employer. The IRS is trying to detect false tax returns before issuing tax refunds.

2. Phishing – This is an unsolicited email or fake website that appears to be legitimate; the purpose is to get the victim to provide personal and financial information so the thief can commit identity or financial theft. The Internal Revenue Service does not contact taxpayers by email, text messages or social media to request personal or financial information.

3. Return Preparer Fraud – Most tax preparers are honest, but beware of those that skim off their clients’ refunds, charge inflated fees for return preparation services and attract new clients by promising guaranteed or inflated refunds.

According to the IRS, here are signals that you may be dealing with an unscrupulous return preparer:

They do not sign the return or place a Preparer Tax identification Number on it.

They do not give you a copy of your tax return.

They promise larger than normal tax refunds.

They charge a percentage of the refund amount as the preparation fee.

They require you to split the refund to pay the preparation fee.

They add forms to the return you have never filed before.

They encourage you to place false information on your return, such as false income, expenses and/or credits.

4. Hiding Income Offshore – This is known as tax evasion. Taxpayers hide 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 Internal Revenue Service pursues taxpayers with undeclared accounts and the banks and bankers suspected of helping them hide their assets overseas.

5. “Free Money” from the IRS & Tax Scams Involving Social Security –  The “free money” scam involves fraudsters advertising free money from the IRS, via flyers in community churches targeted to low income and elderly taxpayers. The fraudsters charge a fee for advice on how to get the “free money” with little or no documentation. When the taxpayer’s claim is rejected, the scammer is nowhere to be found.

The Social Security scam involves false promises of non-existent Social Security refunds or rebates. Another scam is by the taxpayer who may really be due a credit or refund, but uses inflated information to complete the return.

6. False/Inflated Income and Expenses – This involves reporting income that wasn’t earned or expenses that weren’t incurred to maximize refundable credits, such as Earned Income Credit.  Another is falsifying fuel expense to get the fuel tax credit.

Part two of this blog will discuss six other tax scams: false form 1099 refund claims, frivolous arguments, falsely claiming zero wages, abuse of charitable organizations and deductions, disguised corporate ownership, and misuse of trusts.

Credit Expert Witness, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Civil Penalty, Financial, Identity Theft, Internal Revenue Service

This post was written by John Ulzheimer