Tax season certainly brings out the worst in some folks.
Some taxpayers try to push the tax break envelope a bit too far. Others simply refuse to file.
Yeah, go ahead; send me the e-mail about the unconstitutionality of it all. I'll send you back this info on frivolous tax arguments.
They regularly take advantage of the normal stresses of the season. They hone in on folks struggling with the confusing tax code, searching for ways to legally cut tax bills. Most of the time, the con artists take a real tax break or little-known tax provision and twist it to their advantage and your detriment.
When the fraud is revealed, and it eventually will be, con artist victims end up owing not only the taxes they thought they were saving, but also interest and possibly penalties, too.
So remember the old truism that applies even more so at tax time: If it sounds too good to be true, it probably is.
To help you avoid tax cons, the IRS annually issues a list of Dirty Dozen tax scams. This year's top 12 offenders include five new swindles, as well as some tax cons that have been around for years. You can check out this IRS announcement for full details. Below are the highlights:
1. Telephone Excise Tax Refund Abuses: Early filings show some individual taxpayers have requested large and apparently improper amounts for the special telephone tax refund. In many cases, these are not just mistakes; the fraudulent requests are the work of unscrupulous tax preparers. You can read about general filing problems here, and about the IRS crackdown on preparers here.
2. Abusive Roth IRAs: Taxpayers should be wary of advisers who encourage them to shift under-valued property to Roth individual retirement accounts in order to circumvent annual maximum contribution limits.
3. Phishing: This year-round identity theft technique kicks into higher gear in tax season. Internet-based criminals pose as representatives of a financial institution or sometimes the IRS itself and send out fictitious e-mails in
an attempt to trick consumers into disclosing private information. The most common con: fake notice of an outstanding refund that requires the taxpayer to click on a hyperlink to a phony but official-looking Web site where you're asked to enter personal and financial data. You can read more about ways to escape the phishing net here.
4. Disguised Corporate Ownership: Domestic shell corporations and other entities are being formed and operated in certain states for the purpose of disguising the ownership of the business or financial activity and facilitating the underreporting of income.
5. Zero Wages: In this scam, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 showing zero or little income is submitted with a federal tax return in an effort to reduce the filer's true taxable amount of income.
6. Return Preparer Fraud: Dishonest return preparers make their money by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Some preparers promote filing fraudulent claims for refunds on items such as fuel tax credits to recover taxes paid in prior years. Before you hire a tax pro, check out these tips.
7. American Indian Employment Credit: Taxpayers submit returns and claims reducing taxable income by substantial amounts citing an American Indian employment or treaty credit. Although there is an Indian Employment Credit available for businesses that employ Native Americans or their spouses, there is no provision for its use by employees.
8. Trust Misuse: In this oldie but tax baddie, unscrupulous promoters urge taxpayers to transfer assets into trusts they promise will reduce the filers' taxable income amounts. Trusts are legitimate financial and tax planning financial instruments. Just make sure if you want to set one up, you get the advice of a trusted and trained professional. Find out more on abusive offshore trusts here.
9. Structured Entity Credits: Promoters of this scheme, new in 2007, set up partnerships to own and sell state conservation easement credits, federal rehabilitation credits and other credits. The purported credits are the only assets owned by the new partnership, and are used to create a tax loss on the investor’s personal tax return. But forming such an entity is not a viable business purpose, which means the investments are not valid and the losses are not deductible.
10. Abuse of Charitable Organizations and Deductions: The IRS continues to find tax-exempt organizations used improperly shield income or assets from taxation. The primary problem in these cases is when a taxpayer moves assets or income into a tax-exempt supporting organization or donor-advised fund, but maintains control over the assets or income.
11. Form 843 Tax Abatement: This scam rests on faulty interpretation of the Internal Revenue Code and involves the filer requesting abatement of previously assessed tax using Form 843. Many using this scam have not previously filed tax returns and the tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program
12. Frivolous Arguments: Remember that document I promised to send tax protesters at the top of this post? Promoters of frivolous tax arguments hope you haven't read it. Among the claims that courts have struck down are the 16th Amendment authorizing income tax collection was never ratified; wages are not income; filing a return and paying taxes are merely voluntary; and being required to file Form 1040 violates the Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy.
If you are approached by anyone touting any of these scams, first walk away. Then let the IRS know. If you want to know whether a purported contact from the IRS is authentic, call 1-800-829-1040 for confirmation. And if you suspect a case of tax fraud, report it by submitting Form 3949-A, as detailed in this previous post, or by calling 1-800-829-3676.
Good luck this tax season, both in legitimately whittling your IRS bill to the lowest possible level and in avoiding all of these scummy scammers.
Fish-hook-worm image courtesy Speedy Signs decals.