Recently, the IRS issued its Dirty Dozen Tax Scams for 2011. The IRS issues this list each year. In times of economic trouble, scamsters often prey on the vulnerable. It does not make sense to engage in a tax scam to
save money now when you consider the magnitude of the tax, interest and penalties when you are caught and the possibility that you could be prosecuted for fraud and have your liberty taken away.
The IRS’ 2011 Dirty Dozen Tax Scams are as follows:
1. Hiding Income Offshore. United States taxpayers are required to report all of their worldwide income for income tax purposes. Moving money offshore does not shield the income from taxation. In fact, having money in bank accounts offshore requires a United States taxpayer to make additional disclosures to the IRS so the IRS can make sure the income from the account is being reported. Failure to report monies in foreign bank accounts carries with it draconian penalties and sometimes criminal prosecution. The IRS currently has another voluntary disclosure initiative going on which will remove the possibility of criminal prosecution when unreported offshore income is voluntarily reported under the program. The deadline for this initiative is August 31, 2011. If you are considering the voluntary disclosure of offshore income, make sure you consult with a tax professional first.
2. Phishing. Phishing is an internet scam where scamsters try to trick taxpayers into revealing personal information by sending emails purporting to be from the IRS. The personal information is then used for identity theft purposes, accessing bank accounts, running up credit card charges or applying for loans in the taxpayer’s name. All you need to know about this scam is that the IRS NEVER initiates correspondence with taxpayers through email. If you receive an unsolicited email purportedly from the IRS, you can forward it to phishing@irs.gov and they will investigate it.
3. Return Preparer Fraud. Taxpayers are required to review their tax returns and are ultimately liable for all tax positions taken on a tax return. Unscrupulous return preparers sometimes charge inflated fees or contingent fees based on the amount of a refund gained for the taxpayer. These refunds are often based on credits or deductions the taxpayer is not entitled to. Taxpayers need to be very careful in choosing their income tax return preparer. The IRS is trying to improve compliance with tax laws by instituting a number of new requirements on paid tax return preparers, including registration with the IRS. If you need further illustration on this, go to the Department of Justice Tax Division website and see the list of return preparers recently convicted of tax fraud.
4. Filing False or Misleading Forms. The IRS is seeing scamsters file false or misleading returns to claim refunds that they are not entitled to. Frivolous information returns, i.e., Form 1099-Original Issue Discount (OID), claiming false withholding credits are used to legitimize false refund claims.
5. Frivolous Arguments. Promoters of frivolous schemes encourage taxpayers to make unreasonable and unfounded claims to avoid paying the taxes they owe. The IRS has a list of frivolous legal arguments that taxpayers should stay away from. You can locate that list on the IRS’ website by searching for Notice 2008-14. These frivolous arguments are so unreasonable that they usually cause the taxpayer to incur an additional penalty for advancing a frivolous argument.
6. Nontaxable Social Security Benefits with Exaggerated Withholding Credit. The IRS has identified returns where taxpayers report nontaxable Social Security Benefits with excessive withholding. This tactic results in no income reported to the IRS on the tax return. Usually both the withholding amount and the reported income are incorrect.
7. Abuse of Charitable Organizations and Deductions. Abuse of charitable organizations and deductions includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over assets or income from donated property. Other abuses involve the donation of non-cash assets, such as easements on property, closely held stock and real property. Often times these donations are substantially overvalued. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions.
8. Abusive Retirement Plans. The IRS continues to uncover abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers are
using to avoid the limitations on contributions to IRAs as well as transactions that are not properly reported as early distributions.
9. Disguised Corporate Ownership. Some taxpayers form corporations and other entities in certain states for the primary purpose of disguising the ownership of a business or financial activity. Such entities can be used to facilitate underreporting of income, fictitious deductions, nonfiling of tax returns, participating in listed transactions (tax shelters), money laundering, financial crimes and even terrorist financing. The IRS is working with state authorities to identify these entities.
10. Zero Wages. Filing a phony wage or income related information return to replace a legitimate return has been used as an illegal method to lower the amount of taxes owed. 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.
11. Misuse of Trusts. The misuse of trusts never seems to go away. Scamsters urge taxpayers to transfer assets into trusts to illegally reduce income or create phony deductions. Such trusts rarely deliver the promised tax benefits and are being used primarily as a means to avoid income tax liability and hide assets from creditors, including the IRS. Trusts can serve legitimate tax and estate planning purposes but you need to be careful. Again, you can visit the Department of Justice Tax Division webpage to see the list of abusive trust promoters that are convicted of tax crimes.
12. Fuel Tax Credit Scams. The IRS is receiving claims for the fuel tax credit that are unreasonable. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income tax level makes the claim unreasonable.|
When dealing with your taxes, make sure you hire tax professionals that are reputable with the appropriate professional designations. If a tax reporting position seems too good to be true, be extra cautious and vigilant.