Insight from the West Fargo PD: IRS reveals 'Dirty Dozen' scams for 2014
For 2014, the IRS has identified these “Dirty Dozen” tax schemes as the ones to watch:
If you believe you are at risk of identity theft due to lost or stolen personal information, contact the IRS Identity Protection Specialized Unit at 800-908-4490 or visit the IRS’ special identity protection page.
2. Pervasive telephone scams. It’s no surprise to see phone scams near the top of the list. The IRS has reported an increase in phone scams across the country, with callers pretending to be agents or other IRS representatives in hopes of stealing money or identities from victims. There are a number of variations on a theme, ranging from instances in which callers say the victims owe money or are entitled to a huge refund to calls that threaten arrest.
If you get a phone call from someone claiming to be from the IRS and you’re not sure and you have a legitimate tax issue outstanding, call the IRS at 1-800-829-1040. If you get a phone call from someone claiming to be from the IRS and you know you don’t owe taxes, report the incident to the Treasury Inspector General for Tax Administration at 1-800-366-4484.
3. Phishing. Phishing is a scam where criminals attempt to steal your financial information through the use of email or a fake website. In many cases, the bogus emails ask for specific personal information or install spyware or other malware on your computer for the purpose of stealing your financial and personal information.
Remember that the IRS doesn’t initiate contact with taxpayers by email to request personal or financial information, so don’t click on or respond to these kinds of emails. If you 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, you can report it by forwarding it to email@example.com.
4. False promises of “free money” from inflated refunds. From the “there’s no such thing as a free lunch” files, scam artists routinely pose as tax preparers during tax time and promise free money in the form of inflated refunds. They do this by making claims for fictitious rebates, benefits or tax credits.
Remember that you are legally responsible for your tax return even if it was prepared by someone else. So be smart. In addition to the agitation – and large fees paid to the scammers – you could be penalized for filing false claims or receiving fraudulent refunds. Intentional mistakes of this kind can result in a $5,000 penalty.
5. Return preparer fraud. The IRS reports that about 60 percent of taxpayers will use tax professionals this tax season to prepare their tax returns, down a few points from last year. The majority of tax preparers are good people, but some may try to encourage taxpayers to claim improper credits, deductions or exemptions in hopes of boosting refunds. Use care when choosing a preparer, and remember that taxpayers should use only preparers who sign the returns they prepare and enter their IRS preparer tax identification numbers. This is an IRS requirement.
Again, remember that taxpayers are legally responsible for the information on their tax returns even if it is prepared by a professional. You cannot hide behind a tax professional’s signature if you took an inappropriate position on your tax return.
If you have concerns about an abusive tax preparer, you can report him or her to the IRS by using federal Form 14157, Complaint: Tax Return Preparer (downloads as a pdf).
6. Hiding income offshore. It is not illegal to have cash, brokerage accounts or other investments in foreign countries. It is, however, illegal to use those accounts to evade U.S. taxes by hiding that income. There are significant reporting requirements for offshore assets, including Report of Foreign Bank and Financial Accounts filings. Those taxpayers who do not properly report and disclose those accounts are breaking the law and could face civil and criminal penalties and fines.
Why the requirements? Over the years, tax evaders have hidden income in offshore banks, brokerage accounts or nominee entities and used a variety of methods to access the funds. Some have also created foreign trusts, employee-leasing schemes, private annuities or insurance plans in order to hide income. Hiding income and assets from the IRS is illegal. You could be subject to civil and criminal penalties for not reporting assets and income if you are required to do so.
7. Impersonation of charitable organizations. In the wake of tragedies like the tornado disasters in Oklahoma and the Boston Marathon bombings, people often come together. Sadly, scam artists use these disasters as opportunities to cash in, either by operating bogus charities to solicit money or financial information or claiming to be affiliated with existing charitable organizations. They do this by soliciting funds by phone or email or using fake websites. To avoid being taken advantage of, donate to recognized charities using check or credit card where possible. If you’re not sure about the charity, you can search the IRS charitable organization database or use a respected charity database like Charity Navigator.
8. False income, expenses or exemptions. Refundable tax credits are credits that are refunded to you even if you did not owe a tax liability. Taxpayers may be encouraged to bump income amounts in order to those maximize refundable credits (like the earned income tax credit). These scams are
prohibited and making false statements could result in having to repay those refunds plus interest and penalties; in some cases, you may be criminal prosecuted.
Specifically, the IRS is also seeing an uptick in taxpayers filing excessive claims for the fuel tax credit. Generally, this credit is available to farmers and other taxpayers who use fuel for off-highway business purposes; it is not available for trucks driven on highways. As a result, most taxpayers are not eligible for this credit (don’t be fooled). Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.
9. Frivolous Arguments. Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. They often publish books, post websites and send out emails advising that they know something that you don’t because it’s usually (shhh) a secret. But the reason that you likely don’t know the details about these schemes is because they’re bogus.
If you claim what is considered to be a frivolous position on your tax return, you could be subject to substantial fines and penalties, including an immediate assessment of a $5,000 penalty – even if there is no understatement of liability – in addition to any other penalty. Chasing these frivolous arguments and schemes can result in criminal prosecution. Additionally, those who promote frivolous arguments and those who assist taxpayers in claiming tax benefits based on frivolous arguments may be also be prosecuted for a criminal felony.
10. Falsely Claiming Zero Wages or Using False Form 1099. Filing a phony information return, like a form 4852 or 1099, is one way to lower your tax bill. It’s also illegal. You can’t generate your own information forms to support your tax position. And yet, there are a number of schemes that purport to let you do this.
Here’s how one variation of the scheme works: the scammers file a series of false tax forms in an effort to garner large fraudulent tax refunds. Promoters tell customers that the federal government maintains “secret” accounts of money for its citizens and advise that taxpayers can gain access to the funds – and discharge their debts – by issuing forms 1099-OID to their creditors. It’s like magic!
Filing fake forms can get you in a lot of trouble, including huge penalties or criminal prosecution.
11. Abusive Tax Structures. Abusive tax schemes involving increasingly complex tax structures are on the rise. The idea is, apparently, that if you can create enough entities, mix in a debit card or two and park funds offshore, you’ll be sheltered from paying taxes. Only, it doesn’t quite work that way.
IRS Criminal Investigation (CI) has made these kinds of schemes a target and has developed the Abusive Tax Schemes program to combat them. Not only does CI investigate the tax scheme promoters but also those who have a “substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax scheme” (you know, the bankers and lawyers) but also those who knowingly participate in the tax schemes.
Tax crimes are serious business as are money laundering and other financial crimes. Hiding income or assets in an attempt to evade paying tax or making certain disclosures can result criminal prosecution.
12. Misuse of Trusts. There are many legitimate uses for trusts, which range from asset protection to estate planning to management of assets in the event of incapacity. I should know: it’s part of my job to draft many of them.
However, creating trusts for the purpose of tax evasion (as opposed to tax planning), including hiding income or generating bogus deductions, is not an appropriate use of trusts. You should exercise special caution when creating foreign trusts, irrevocable trusts or any trusts that have, as their main purpose, the significant reduction or elimination of tax especially if those trusts involve shifting or hiding assets. The IRS has also advised that it has seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses, as well as to avoid estate transfer taxes.
Again, there are some legitimate trusts – like marital deduction trusts or irrevocable life insurance trusts – that can have significant tax advantages. Be sure to consult with a trusted advisor before entering into any trust agreements for the purpose of tax and/or estate planning.
As always, avoiding trouble at tax time involves using common sense. Remember, if it sounds too good to be true, it probably is.
Michael Reitan is the assistant police chief for West Fargo