The IRS has released its annual list of “dirty dozen” tax scams. (IRS News Release 2012-23)
The list for 2012 contains few surprises. Nevertheless, taxpayers should remain vigilant. Here’s a quick rundown.
1. Identity theft: The IRS has embarked on a comprehensive strategy focused on preventing, detecting and resolving identity theft cases as soon as possible. In addition to the law-enforcement crackdown, the IRS has stepped up its internal reviews to spot false tax returns before tax refunds are issued.
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 personal information. Report suspicious activity to email@example.com.
3. Return preparer fraud: Most tax return preparers provide honest service to their clients. But questionable 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.
4. Hiding income offshore: Over the years, numerous 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.
5. “Free money” from IRS: Fliers 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.
6. False/inflated income and expenses: Including income that was never earned, either as wages or as self-employment income in order to maximize refundable credits, is another popular scam. This could result in erroneous refunds, including interest and penalties, and in some cases, even prosecution.
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.
8. 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.
9. 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.
10. 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.
11. 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, avoid filing tax returns, participate in listed transactions and facilitate money laundering, and financial crimes.
12. 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.
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