At Attorneys Corporation Service, Inc. our goal is to provide our clients — attorneys, CPAs, and other licensed professionals — with expedited services and assistance for their business filing and incorporation needs. As many tax preparers know, an Employer Identification Number is essential during tax season. In honor of this busy time, we brought you a list of the IRS’ top tax scams (part 1 of 3). Great info to share with your clients!
Illegal tax scams can lead to significant penalties and possible criminal prosecution. The IRS Criminal Investigation Division works closely with the Department of Justice to shut down scams and prosecute the criminals behind them.
The following is our writeup of the Dirty Dozen tax scams identified by the IRS:
1. Identity Theft
In response to the increase in identity theft, the IRS has embarked on a comprehensive strategy focused on preventing, detecting, and resolving identity theft cases as soon as possible. The IRS has stepped up its internal reviews to spot false tax returns before tax refunds are issued as well as working to help victims of the identity theft refund schemes. Identity theft cases are among the most complex ones the IRS handles and the agency is committed to working with taxpayers who have become victims of identity theft.
The IRS has a thorough screening process with measures intended to stop fraudulent tax returns. Even with the IRS’ aggressive approach to tax-related identity theft, the agency is seeing an increase in identity crimes; including more complex schemes. In 2011, the IRS protected more than $1.4 billion of taxpayer funds from getting into the wrong hands due to identity theft.
If you believe your or your client’s personal information has been stolen and used for tax purposes should immediately contact the IRS Identity Protection Specialized Unit. For more information, visit the special identity theft page at www.IRS.gov/identitytheft.
Phishing is a scam typically carried out with the help of unsolicited e-mail or a fake website. Posing as a legitimate site, the goal is to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.
If you receive an unsolicited e-mail message that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report the message by sending it to firstname.lastname@example.org.
Be aware that the IRS does not initiate contact with taxpayers by e-mail to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.
3. Return Preparer Fraud
About 60% of taxpayers will use tax professionals (like you) this year to prepare and file their tax returns. Perhaps you have hired a professional to file your tax returns. While most return preparers provide honest service to their clients, there are also some who prey on unsuspecting taxpayers.
Be on the lookout for questionable return preparers who skim off clients’ refunds, charge inflated fees for return preparation services and attract new clients by promising guaranteed or inflated refunds. As when hiring anyone to handle your money, you should choose carefully when hiring a tax preparer. In 2012, every paid preparer needs to have a Preparer Tax Identification Number (PTIN) and enter it on the returns he or she prepares.
So how do you know if you are dealing with an unscrupulous return preparer? Signs include:
- The preparer does not sign the return or place a Preparer Tax identification Number on it.
- The preparer does not give you a copy of your tax return.
- The preparer promises larger than normal tax refunds.
- The preparer charges a percentage of the refund amount as preparation fee.
- The preparer requires you to split the refund to pay the preparation fee.
- The preparer adds forms to the return you have never filed before.
- The preparer encourages you to place false information on your return, such as false income, expenses and/or credits.
4. Hiding Income Offshore
Over the years, we’ve learned of numerous individuals who have evaded 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; and that’s likely just the tip of the iceberg. Employing foreign trusts, employee-leasing schemes, private annuities or insurance plans is also a common way to hide funds in offshore accounts.
The IRS pursues taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas and works closely with the Department of Justice to prosecute tax evasion cases.
While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. It’s the responsibility of a tax professional to ensure his or her clients who maintain such accounts comply with reporting and disclosure requirements in order to avoid potential criminal prosecution.
5. “Free Money” from the IRS & Tax Scams Involving Social Security
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 communities around the country. These schemes are often spread in church communities and by word of mouth, as well-intentioned people tell their friends and relatives.
There are a number of tax scams involving Social Security. For example, scammers have been known to lure ‘susceptible’ individuals, such as the elderly and sick, with promises of non-existent Social Security refunds or rebates. In another situation, a taxpayer may really be due a credit or refund but uses inflated information to complete the return.
Beware. Intentional mistakes of this kind can result in a $5,000 penalty.
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 common scam. Not surprisingly, the IRS warns that claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits (such as the Earned Income Tax Credit) could have serious repercussions; including repaying the erroneous refunds, plus interest and penalties, and in some cases, even prosecution.
Additionally, some taxpayers have filed excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. Individuals who have claimed the tax credit when their occupations or income levels make the claims unreasonable could face penalties.
7. False Form 1099 Refund Claims
In this age-old 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 tell you to claim deductions or credits to which you are not entitled or encourage your clients to do so. Also, do not allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.
8. Frivolous Arguments
In order to avoid having taxpayers pay the taxes they owe, promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims. This is against the law and violators may be prosecuted.
9. Falsely Claiming Zero Wages
Oftentimes, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS. Filing this type of return may result in a $5,000 penalty.
10. Abuse of Charitable Organizations and Deductions
IRS examiners continually 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. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new standards for qualified appraisals.
11. Disguised Corporate Ownership
In this scam, third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business. These entities are often used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering, and financial crimes; all of which are against the law.
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. Not only do such trusts rarely deliver the tax benefits promised, they are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS, and are against the law.
Follow us on Twitter for more tax and business news.
Attorneys Corporation Service, Inc. provides fast, reliable formation services and quality products. For customized Corporate Kits, LLC Kits, Estate Plan Organizers and Corporate Supplies, your premier source is Attorneys Corporation Service. We also have solutions for tough filing assignments and provide lots of helpful business tips on our blog. Call us at 800.462.5487 to see how you can create great corporate records to steer clear of IRS tax problems.