Financial Resource Center


IRS Releases Dirty Dozen Tax Scams

by Center for Personal Finance editors / March 14th, 2012

The Internal Revenue Service (IRS) has issued its annual Dirty Dozen ranking of tax scams so taxpayers can protect themselves against schemes ranging from identity theft to return preparer fraud. The Dirty Dozen tax scams for 2012 include:
  1. Identity theft. Responding to growing identity theft concerns, the IRS has focused on preventing, detecting, and resolving identity theft cases. In addition to the law-enforcement crackdown, the IRS stepped up its internal reviews to spot false tax returns before tax refunds are issued. The agency also is working to help victims of identity theft refund schemes.
  2. 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. Keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information.
  3. Return preparer fraud. 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. Choose carefully when hiring a tax preparer.
  4. Hiding income offshore. While there are legitimate reasons for maintaining financial accounts abroad, taxpayers must meet reporting requirements. U.S. taxpayers who maintain such accounts and fail to comply with reporting and disclosure requirements are breaking the law and risk significant penalties and fines, and the possibility of criminal prosecution, says the IRS.
  5. "Free money" from the IRS and tax scams involving Social Security. Scammers prey on low-income individuals and the elderly. They build false hopes and charge people good money for bad advice. In the end, the victims discover their claims are rejected. Meanwhile, the promoters are long gone. Remain vigilant.
  6. 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, one that could have serious repercussions.
  7. 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. Don't fall prey to people who encourage you to claim deductions or credits to which you are not entitled. Nor should you willingly allow others to use your information to file false returns.
  8. Frivolous arguments. Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law, says the IRS.
  9. Falsely claiming zero wages. Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Resist participating in any variations of this scheme. Filing this type of return may result in a $5,000 penalty.
  10. Abuse of charitable organizations and deductions. IRS examiners continue to uncover the intentional abuse of charitable 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.
  11. Disguised corporate ownership. Third parties are improperly used to request employer identification numbers and to form corporations that obscure the true ownership of the business. The perpetrators use these entities to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions, and facilitate money laundering and financial crimes.
  12. Misuse of trusts. 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, consumers should seek the advice of a reputable professional before entering a trust arrangement.
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