The Internal Revenue Service (IRS) has been releasing the “dirty dozen” of tax scams on an annual basis for years. This year, some old classics and some new twists indicate that false reporting, hiding income, or simply stealing from the U.S. government is still big business.
Falsifying information on tax returns is the most basic level of fraud. But some people will improperly cite arcane tax laws or commit identity theft. The most complicated tax dodges include hiding income in foreign bank accounts, setting up fake corporations or inappropriately using trusts.
CNN.com reports that, “Criminals across the country are raking in billions of dollars in tax refunds through a new and brazen form of fraud that takes advantage of the IRS’s fast online returns,”
Using identity theft to steal refunds reaps huge money and has become a hot news item on its own. According to Credit Cards.com, “Fraudsters find willing accomplices who have access to Social Security numbers at places such as doctor’s offices and insurance companies or from credit card applications. The accomplices may steal 100 names and Social Security numbers, and get paid $1,000.”
Next, the thieves go online and use the information to file fake tax returns. The IRS will send the returns in the form of debit cards that are then used to get cash or to buy goods. The real taxpayer may not recover their money for a year. According to the report, the IRS identified only $6.5 billion in tax identity fraud, but has no real way to tell how much of the fraud is actually going on.
Phishing scams work through email, text messages and phone calls. The IRS is not going to send an email, a text or call on the phone. Important matters come in documents and through the U.S. mail. The callers, emails and text messages will usually demand that the victim give up enough personal information for a criminal to steal their identity. Do not accept or respond to calls, emails or texts claiming to be from the IRS. Also, watch out for “spoof” sites that look identical to the IRS site. A simple typing error while entering the web address can lead to a fake website that is only set up to collect enough personal information to commit an identity theft.
Hiding money overseas will not be as easy in 2012. The IRS is working on this from two directions, first by making it easy to “amnesty” report the assets and second, by cracking down on hidden overseas accounts.
Nonsense from amateur “tax avoidance experts” will still be a problem. These scams are called “frivolous argument” or “jailbait” scams. Anyone who cites arcane laws, claims to know special constitutional or legal facts, or advises that certain types of income are not really taxable income, is not telling the truth. The tax avoidance extremists will be working hard this year, which makes it more important to go to a reputable and licensed tax preparer.
Speaking of tax preparers, reputable ones do not add unusual or unknown forms to the tax package without explaining them. Tax preparers must have the Preparer Tax Identification Number (PTIN), and must enter it on the forms. Tax preparers are required to sign the finished tax form, and must give the client a copy of their completed form. Never allow a tax preparer to advise falsifying facts or numbers. Finally, a reputable tax agent does not demand part of the refund in payment for their services.
Misusing trusts to avoid taxes is another type of fraud that the IRS will be looking for. Trusts are fine for complicated and family matters, but they are not to be set up for hiding assets or defrauding the government on income reports.
Corporations are also set up for reasonable purposes, but are not to be faked or used to hide assets from the IRS. Misused or fake charitable corporations are also an area where taxpayers can be misled into committing fraud and crimes.
The poor and elderly are targets for scams where “free government money” is involved. The scam generally involves fee based “help” with the forms. By the time the victim finds their “claim” has been denied, the thief and the fees are long gone. Look for posters, ads and glib individuals who target churches, senior and elderly housing and low-income neighborhoods.
Any number of scams involve doctoring the W4 form, which is the employer’s statement of a taxpayer’s income. These forms can be modified or corrected by the taxpayer for legitimate reasons, but scam operations will change the income or change the income to zero in order to hide income from the government. Never let an “adviser” sell this idea. Penalties and even criminal charges can result.
Another income tax scam involves inflating income or expenses to minimum levels that qualify a taxpayer for tax credits. Tax credits are usually more lucrative than regular tax deductions, but minimum amounts must actually be earned or spent in order to qualify. This tactic can result in fines and criminal penalties.
The Form 1099 scam is based on a bogus theory that the government has a “secret account” for every American citizen and that the form 1099 can be used to get some of that money. While the Form 1099 is a real form, it is not for getting free money from any secret account! False filings can result in fines and criminal prosecution. Allowing someone else to use false information to prepare such a form will still result in fines and penalties.
In summary, keep a tight hold on personal information this year, and keep an eye out for identity theft. Do not believe claims that are too good to be true, that promise excessive returns, or that offer help with getting “free money”. Never falsify statements, facts or income reports. Do not get involved in fraudulent charitable, corporate or offshore income hiding schemes. Finally, look for a reputable tax preparation professional who does not show any signs of trouble.