IRS Dirty Dozen
Agency Warns of 12 Common Scams
In an update of an annual consumer alert, the Internal Revenue Service urged taxpayers to avoid falling victim to one of the “Dirty Dozen” tax scams. In the new rankings, several new scams have reached the top of the consumer watch list, including offshore banking and identity theft schemes. The IRS and other federal agencies are aggressively pursuing and prosecuting promoters of these schemes and many of their clients for fraud and tax evasion. These can result in imprisonment, fines and repayment of taxes owed with interest and penalties. Even innocent taxpayers involved in these schemes can face a staggering amount of back interest and penalties. Taxpayers who suspect tax fraud can report it to the IRS at 1-800-829-0433.
The IRS urges people to avoid these common schemes:
Offshore Transactions
Some people use offshore transactions to avoid paying United States income tax. Use of an offshore credit card, trust or other arrangement to hide or under-report income or to claim false deductions on a federal tax return is illegal.
A taxpayer involved in these schemes may be subject to payment of taxes, interest, penalties and potential criminal prosecution.
Identity Theft
Identity thieves use someone’s personal data to steal his or her financial accounts, run up charges on the victim’s existing credit cards, apply for new loans, credit cards, services or benefits in the victim’s name and even file fraudulent tax returns. The IRS says it is aware of at least two recent identity theft scams involving taxes or the IRS. In one, tax preparers allegedly used information, such as Social Security numbers and financial information, from their clients’ tax returns to commit identity theft. In another, fraudsters sent bank customers fictitious bank correspondence and IRS forms in an attempt to trick them into disclosing their personal and banking data. For taxpayers, it pays to be choosy about disclosing personal and financial information. It is very important to carefully select a reputable tax professional.
Phony Tax Payment Checks
In this scheme, con artists sell fictitious financial instruments
that look like checks to pay a tax liability, mortgage and other debts. The con
artists may also counsel their clients to use a phony check to overpay their taxes
so they can receive a refund from the IRS for the overpayment. The false checks,
called sight drafts, are worthless and have no financial value. It is illegal
to use these sight drafts to pay a tax liability or other debts.
African-Americans Get a Special Tax Refund
Thousands of African-Americans have been misled by people offering
to file for tax credits or refunds related to reparations for slavery. There is
no such provision in the tax law. Some unscrupulous promoters have encouraged
clients to pay them to prepare a claim for this refund. But the claims are a waste
of money. Promoters of reparations tax schemes have been convicted and imprisoned.
And taxpayers could face a $500 penalty for filing such claims if they do not
withdraw the claim.
According to the IRS, in early 2002, the slavery reparations scam ranked as the
No. 1 scheme on the Dirty Dozen list. Following a sweeping public outreach campaign
and assistance from members of the Congressional Black Caucus and other organizations,
the number of reparation scam claims fell sharply. Tens of thousands of claims
were received in 2001, but the claims fell to less than 50 per week in 2002.
No Taxes Withheld From Wages
Illegal schemes are being promoted that instruct employers not to withhold federal
income tax or employment taxes from wages paid to their employees. These schemes
are based on an incorrect interpretation of tax law and have been refuted in court.
A recent flurry of court actions has been taken against promoters of these schemes
by the IRS.
Improper Home-Based Business
This scheme purports to offer tax “relief” but in
reality is illegal tax avoidance. The promoters of this scheme claim that individual
taxpayers can deduct most, or all, of their personal expenses as business expenses
by setting up a bogus home-based business. But the tax code firmly establishes
that a clear business purpose and profit motive must exist in order to generate
and claim allowable business expenses.
Pay the Tax, Then Get the Prize
The caller says you’ve won a prize, and all you have to
do to get it is to pay the income tax due. Don't believe it. Someone who really
wins a prize may need to make an estimated tax payment to cover the taxes that
will be due at the end of the year. But the payment goes to the IRS – not
the caller. Whether the prize is cash, a car or a trip, a legitimate prize giver
generally sends both the winner and the IRS a Form 1099 showing the total prize
value that should be reported on the winner’s tax return.
Frivolous Arguments
Frivolous arguments are false arguments that are unsupported by law. When a scheme
promoter says “I don’t pay taxes – why should you” or urges
you to “untax yourself for $49.95,” beware. These scams are as old as
snake oil, but people continue to be taken in. And now they’re on the Internet.
The ads may say that paying taxes is “voluntary,” but case law doesn’t
support that idea. The U.S. courts have continuously rejected this and other frivolous
arguments. Unfortunately, hundreds of people across the country have paid for
the “secret” of not paying taxes or have bought “untax packages.”
Then they find out that following the advice contained in them can result in civil
and/or criminal penalties. Numerous sellers of the bogus schemes have been convicted
on criminal tax charges.
Social Security Tax Scheme
Taxpayers shouldn’t fall victim to a scam offering refunds
of the Social Security taxes they have paid during their lifetimes. The scam works
by the victim paying a "paperwork" fee of $100, plus a percentage of
any refund received, to file a refund claim with the IRS. This hoax fleeces the
victims for the up-front fee. The law does not allow such a refund of Social Security
taxes paid. The IRS processing centers are alert to this hoax and have been stopping
the false claims.
"I Can Get You a Big Refund ...for a Fee!"
Refund scheme operators may approach someone wanting to "borrow" their Social Security number or give him or her a phony W-2 so it appears that the person qualifies for a big refund. They may promise to split the refund with that person, but the IRS catches most of these false refund claims before they go out. And when one does go out, the participant usually ends up paying back the refund along with stiff penalties and interest. Two lessons to remember:
- Anyone who promises someone a bigger refund without knowing their tax situation could be misleading them
- Never sign a tax return without looking it over to make sure it’s honest and correct.
Always carefully scrutinize access to your Social Security number.
Share/Borrow EITC Dependents
Unscrupulous tax preparers "share" one client's
qualifying children with another client in order to allow both clients to claim
the Earned Income Tax Credit. For example, one client may have four children
but only needs to list two to get the maximum EITC. The preparer will list two
children on the first client’s return and the other two on another client’s
tax return. The preparer and the client "selling" the dependents split
a fee. The IRS prosecutes the preparers of such fraudulent claims, and participating
taxpayers could be subject to civil penalties.
IRS “Agent” Comes To Your House
To Collect
First, do not let anyone into your home unless they identify
themselves to your satisfaction. IRS special agents, field auditors and collection
officers carry picture ID’s and will normally try to contact you before
they visit. If you think the person on your doorstep is an impostor, lock your
door and call the local police. To report IRS impostors, call the Treasury Inspector
General’s Hotline at 1-800-366-4484.
Beyond the “Dirty Dozen,” there are many other tax schemes.
Some examples include home- based business scams, disabled access credit for
pay phones and a variety of improper abusive trusts.
The best advice for taxpayers is to remember the concept
of “buyer beware”. Think carefully before paying for services or signing
important documents. And don’t be fooled by outrageous promises. If something
sounds too good to be true, it probably is.
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