As it does every year during filing season, the IRS released its annual list of the Dirty Dozen tax scams, updated for the 2017 filing season. Anyone following the news will not be surprised that the top scam is phishing, which has affected tax preparers, company payroll and human resources departments, and individual taxpayers.
So without further ado, here is the IRS’s list of this year’s dozen top worst scams, which while happening all year round, tend to peak during tax season.
1. Phishing schemes. Phishing schemes, which involve fake email or websites that trick taxpayers or practitioners into giving personal information and login or password information, leads the list. I received one of these fakes just this morning purporting to be from Amazon.com. Be wary about clicking on any attachments or links in emails.
2. Phone scams. The number of taxpayers receiving aggressive and threatening phone calls from criminals impersonating IRS agents increases during filing season. These calls may threaten police arrest, deportation, license revocation, etc. The IRS usually initiates contact with taxpayers by mail, not by phone, and says it would never threaten any of those things when attempting to collect taxes.
3. Identity theft. Tax-related identity theft remains a top concern. The Security Summit Partners, consisting of the IRS, state tax agencies, and the tax preparation industry, have applied more safeguards against this crime this year and say they will continue to step up their efforts.
4. Return preparer fraud. The IRS warned taxpayers to be careful to avoid unscrupulous tax return preparers. Although the vast majority of tax preparers provide honest, high-quality service, some dishonest preparers set up shop each filing season to perpetrate refund fraud, identity theft, and other scams that hurt taxpayers. Be wary of preparers who promise overly large refunds.
5. Fake charities. Scam artists set up fake charities to steal money and personal information from well-meaning taxpayers. Many of these scammers use names that are similar to well-known charities or set up websites that look like legitimate charities; some fake charities prey on people after large natural disasters. Before donating your hard-earned money, you might consider checking the IRS website, Exempt Organization Select Check, to be sure you are giving to a legitimate organization.
6. Falsely inflating refund claims. This scam takes many forms, including dishonest preparers contacting taxpayers who normally don’t file and filing returns claiming inflated refunds for them (or stealing their identities and keeping any refund). It also involves people who normally file and receive refunds falling victim to scam artists who file returns for them claiming earned income tax credits (EITCs) or education credits, or otherwise inflate deductions to get taxpayers larger refunds than they are entitled to.
7. Excessive claims for business credits. The IRS mentioned specifically fuel tax credit and research tax credit scams. Most individual taxpayers do not qualify for such credits and should not be taken in by preparers who fraudulently claim the credit on taxpayers’ returns or who claim it as part of an identity-theft refund scheme.
8. Falsely padding deductions. This scam involves taxpayers falsely padding deductions, expenses, or claiming credits they are not entitled to. Included in the IRS’s list is overstating charitable contributions or business expenses, or falsely claiming credits, such as the EITC.
9. Falsifying income to claim tax credits. This scam involves reporting fraudulent amounts of earned income in order to qualify for certain tax credits, such as the EITC, which requires taxpayers to have income earned from a job or business to qualify for the credit. The IRS also mentioned a scam involving false Forms 1099-MISC, Miscellaneous Income.
10. Abusive tax shelters. For the third consecutive year, according to the IRS, it places abusive micro-captive insurance company tax shelters on its list of the top 12 tax scams. Although permitted by the Code, many do not meet the rigid requirements to qualify.
11. Frivolous tax arguments. Don’t be taken in by outlandish legal arguments to avoid paying taxes that have consistently been thrown out of court. Some of the more common arguments are that you can avoid taxes on religious or moral grounds or that only federal employees are subject to tax. Besides having to pay any unpaid taxes, plus penalties and interest, you could be subject to a $5,000 penalty for making a frivolous argument.
12. Offshore tax cheating. The IRS defines this as avoiding taxes by hiding money or other assets in unreported offshore accounts. It uses as an example of the types of schemes for evading U.S. taxes: attempting to hide income in offshore banks, brokerage accounts, or nominee entities, which are then accessed using debit cards, credit cards, or wire transfers. Other taxpayers use foreign trusts, employee-leasing schemes, private annuities, or insurance plans to evade tax.
It is harder for taxpayers to hide these illicit activities now that worldwide reporting has become more widespread. Taxpayers who do not disclose these foreign assets or accounts risk significant penalties as well as possible criminal prosecution.
Being aware of the above scams can help you avoid much difficulty and angst later on. While not a complete list, these certainly are the most common you need to know about.
(Lane Keeter, CPA is Office Managing Partner of the Heber Springs Office of EGP, PLLC, CPAs & Consultants)