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IRS Names Dirty Dozen Tax Scams of 2013

The Internal Revenue Service has released its annual “Dirty Dozen” list of tax scams, advising taxpayers to be aware of identity theft, phishing scams and several other red flags that can cause financial mayhem.

Granted, tax fraud can strike any day of the week, but the IRS noted that there’s an uptick when individuals are trying to prepare their taxes during the filing season. “This tax season, the IRS has stepped up its efforts to protect taxpayers from a wide range of schemes, including moving aggressively to combat identity theft and refund fraud,” Acting Commissioner Steven Miller said in a statement. “The Dirty Dozen list shows that scams come in many forms during filing season.”

Identity theft

Identity theft tops this year’s Dirty Dozen list. The moment a tax fraudster gets their hands on an individual’s name, Social Security number and date of birth, they are able to use that information to fraudulently file a tax return and claim a refund.

For the 2013 tax season, the IRS bolstered its efforts to battle identity theft and refund fraud. In 2012, the IRS was able to stop $20 billion of fraudulent refunds, as well as those associated to identity theft. In 2011, it prevented $14 billion of falsified refunds from going out.


Be careful not to click on the link from that unsolicited e-mail and don’t stay too long on that fake Web site that poses as an authentic site. The IRS warns that these are ways scam artist try to lure their victims and prompt them to provide personal and financial information. Once the valuable information in their hands the impostor can commit identity theft or financial theft.

It is important to note that the IRS does not initiate contact with taxpayers by e-mail to request personal or financial information. The IRS will not send taxpayers text messages or reach to them on Facebook, Twitter or any other social media platforms. Tell your clients that if they receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System, report it by sending it to

Return preparer fraud

Roughly 60 percent of taxpayers will use tax professionals to prepare their tax returns this year. While most return preparers provide honest service to their clients, there are some deceitful preparers out there. The IRS advises taxpayers to choose carefully when hiring an individual or a firm to prepare their return, warning taxpayers that they should only use preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers.

Hiding income offshore

There are quite of few people who try to evade 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.

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice to prosecute tax evasion cases.

“Free Money” from the IRS and tax scams involving Social Security

Brochures 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 throughout the U.S. These schemes promise refunds to people who have little or no income and normally don’t have a tax filing requirement — and are also often spread by word of mouth as unsuspecting and well-intentioned people tell their friends and relatives.

Scammers prey on low-income individuals and the elderly and members of church congregations with bogus promises of free money. They build false hopes and charge people good money for bad advice, including encouraging taxpayers to make fictitious claims for refunds or rebates based on false statements of entitlement to tax credits.

Impersonation of charitable organizations

Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.

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. 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. This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.

Additionally, some taxpayers are filing 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. But other individuals have claimed the tax credit although they were not eligible. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.

False Form 1099 refund claims

In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS. In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount, to justify a false refund claim on a corresponding tax return.

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. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.

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. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.

Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme. Filing this type of return may result in a $5,000 penalty.

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. The IRS is working with state authorities to identify these entities and bring the owners into compliance with the law.

Misuse of trusts

For years, unscrupulous promoters have urged taxpayers to transfer assets into 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. Such trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.

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, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.

By Tamika Cody

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