IRS Reveals List of Top Tax Scams for 2016
The IRS kicked off tax filing season by publishing a series of press releases that highlight the “dirty dozen” tax scams for this year. Although there are no major surprises, it’s important to note that these scams have become increasingly technology-driven in recent years. Taxpayers can use this list to avoid becoming the victim or perpetrator of fraud.
1. Identity Theft
Tax-related identity theft typically occurs when someone uses a stolen Social Security number to file a tax return and claim a fraudulent refund. Often, victims are unaware that their data has been stolen until they receive letters from the IRS stating that returns had already been filed using their Social Security numbers. The IRS cautions taxpayers to guard their personal information closely — in both paper and electronic formats.
2. Phone Scams
Aggressive phone calls by criminals impersonating IRS agents remain a major threat to taxpayers, ranking second on the 2016 list. The agency has seen a surge of phone scams that threaten arrest, deportation, license revocation and other enforcement actions. The callers may demand personal information — such as Social Security numbers and account PINs — or immediate payments over the phone using credit, debit or prepaid cards.
Some criminals pose as someone from an organization you recognize and then send mass emails under your name. They may pretend to be employees of a bank, credit card company, tax software provider or government agency. Criminals even create websites that appear legitimate but contain phony login pages. When you open a phishing email or click on a link it contains, your personal information may be compromised.
4. Return Preparer Fraud
The vast majority of tax professionals provide honest, high-quality service. But some dishonest preparers perpetrate refund fraud, identity theft and other scams that hurt taxpayers.
Beware of preparers who make promises that seem too good to be true, including exceptionally low fees or extraordinary tax refunds. Choose a licensed professional with years of experience and an established reputation in your business community.
5. Hiding Money or Income in Foreign Accounts
Individuals may evade U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then 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.
6. Inflated Refund Claims
Scam artists routinely pose as tax preparers during tax-filing season, luring victims in by promising large federal tax refunds. They use flyers, advertisements, phony storefronts and word of mouth to cast a wide net for victims — even spreading the word through community groups or churches where trust is high.
7. Fake Charities
“Fake charities set up by scam artists to steal your money or personal information are a recurring problem,” warns Commissioner Koskinen. “Taxpayers should take the time to research organizations before giving their hard-earned money.”
8. Falsely Padding Deductions
The IRS warns taxpayers to think twice before overstating deductions. In addition to targeting claims for excessive charitable contribution deductions, the IRS is on the lookout for taxpayers who pad small business expenses or claim credits they’re not entitled to receive, such as the Earned Income tax credit or child tax credit.
9. Excessive Claims for Business Credits
Some taxpayers may try to inflate business tax credits or claim business credits that they’re not eligible to receive. For instance, the fuel credit is generally limited to off-highway business use or farming. But unscrupulous taxpayers may attempt to fraudulently claim the credit for personal use or falsify mileage records to claim it.
10. Falsifying Income to Claim Tax Credits
This scam involves inflating or including income on a tax return that was never earned, either as wages or as self-employment income. The ultimate goal with these scams is usually to maximize refundable credits, such as the Earned Income tax credit (a particular IRS hot button). Taxpayers who attempt to falsify income may be charged significant penalties and interest — and doing so often leads to criminal prosecution by the Department of Justice.
11. Abusive Tax Shelters
A scam that recurs every year on the “dirty dozen” list is abusive tax shelters. Years ago, these ploys involved simple structuring of abusive domestic and foreign trusts. But they’ve become much more sophisticated, exploiting the financial secrecy laws of some foreign jurisdictions and the availability of credit and debit cards issued from offshore financial institutions. Perpetrators often use multiple pass-through entities, which they design to conceal the true nature and ownership of the taxable income and assets.
12. Frivolous Tax Arguments
“The IRS and the courts hear many outlandish arguments from people trying to avoid their legal filing and tax obligations,” warns Commissioner Koskinen. “Taxpayers should avoid unscrupulous promoters of false tax-avoidance arguments because taxpayers end up paying what they owe plus potential penalties and interest mandated by law.”
Minimize Taxes Using Legitimate Means
It’s illegal to scam unwary taxpayers or evade taxes. The IRS continues to use its resources to catch and prosecute dishonest individuals. The main messages from this year’s dirty dozen tax scams are clear: Taxpayers need to watch out for potential scams and adhere to the letter of the law.
Contact us with any tax related questions.