Client Memo – IRS Dirty Dozen

by | Mar 14, 2013 | Client Memo, Security

The Internal Revenue Service recently issued its annual “Dirty Dozen” list of common tax scams, reminding taxpayers to use caution during tax filing season to protect themselves against a wide range of schemes ranging from identity theft to return preparer fraud. We urge you to use caution when viewing and responding to e-mails, responding to telephone requests or receiving tax advice as these scams can be sophisticated and take many different forms as follows.  We also strongly recommend that before you respond to any email or phone call that you seek advice from our office or counsel to protect yourself:

Identity Theft – In many cases, an identity thief uses a legitimate taxpayer’s identity, name, and Social Security Number, to fraudulently file a tax return and claim a refund. Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should contact the IRS Identity Protection Specialized Unit at 800-908-4490 immediately so the agency can take action to secure their tax account.

Pervasive Telephone Scams – Victims are asked to pay their income taxes promptly through a debit card, credit card, or wire transfer; if refused, they are then threatened with arrest, suspension of a business, or driver’s license.

Phishing – Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Please see our earlier client memo to learn about this scheme – Fraudulent EFTPS Email Scams. It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS has various privacy topics online that can help you protect yourself from email scams – IRS Privacy Topics.

False Promises of “Free Money” from Inflated Refunds – Scammers use flyers, advertisements, phony storefronts, and even word of mouth in community groups or churches to promote large federal tax refunds or fictitious benefits and charge consultation fees for the false information. In some cases, they file a false return in the victim’s name to fraudulently claim tax refunds or benefits via direct deposit into their bank accounts. The IRS reminds all taxpayers that they are legally responsible for information reported on their returns even if a tax preparer is used. Please note that intentional mistakes or false claims can result in a $5,000 penalty.

Return Preparer Fraud – The IRS wants to remind all taxpayers that they should use preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs). Using an abusive tax preparer can result in tax fraud or identity theft. For tips about choosing a preparer, details on preparer qualifications, and information on how and when to make a complaint, visit

Hiding Income Offshore – This is typically done through offshore banks, brokerage accounts, or nominee entities and then using debit cards, credit cards, or wire transfers to access the funds. Others have employed foreign trusts, employee leasing schemes, private annuities, or insurance plans for the same purpose. While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that should be complied with to avoid the risk of significant penalties and fines, as well as the possibility of criminal prosecution.

At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) offering taxpayers with undisclosed offshore income an opportunity to become current with their tax obligations. It is in the best long-term interest of taxpayers to come forward and catch up on their filing requirements.

Impersonation of Charitable Organizations – Following major disasters, it is common for scam artists to impersonate charities to solicit money or private information from well-intentioned taxpayers by telephone or email. They may even directly contact disaster victims and claim to be working for the IRS to help the victims file casualty loss claims and receive tax refunds. The IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips:

  • To help disaster victims, donate to recognized charities.
  • Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. The IRS has a search feature on its website – Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible.
  • Don’t give out personal financial information, such as Social Security numbers or credit card and bank account numbers and passwords, to anyone who solicits a contribution from you. Scam artists may use this information to steal your identity and money.
  • Don’t give or send cash. For security and tax record purposes, contributing by check or credit card is another way that provides documentation of the gift.

False Income, Expenses, or Exemptions – Another scam involves inflating or including income or expenses on a tax return that was never earned or paid in order to maximize refundable credits such as the Earned Income Tax Credit. This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.

Frivolous Arguments – Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid – The Truth About Frivolous Tax Arguments. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or disregard their responsibility to pay taxes.

Falsely Claiming Zero Wages or Using False Form 1099 – Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Taxpayers should resist any temptation to participate in any variations of this scheme as filing this type of return may result in a $5,000 penalty.

Abusive Tax Structures – Abusive tax schemes have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions. IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax schemes. CI’s primary focus is on the identification and investigation of the tax scheme promoters as well as those who play a substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax scheme (e.g., accountants or lawyers).  Secondarily, but equally important, is the investigation of investors who knowingly participate in abusive tax schemes.

What is an abusive scheme? The Abusive Tax Schemes program encompasses violations of the Internal Revenue Code (IRC) and related statutes where multiple flow-through entities are used as an integral part of the taxpayer’s scheme to evade taxes.  These schemes are characterized by the use of Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards, and other similar instruments. The schemes are usually complex involving multi-layer transactions for the purpose of concealing the true nature and ownership of the taxable income and/or assets. The IRS encourages taxpayers to report unlawful tax evasion online – Where Do You Report Suspected Tax Fraud Activity?

Misuse of Trusts – Trusts are also commonly used in abusive tax structures. They are highlighted because promoters continue to urge taxpayers to transfer large amounts of assets into trusts. These assets include not only cash and investments but also successful ongoing businesses. There are legitimate uses of trusts in tax and estate planning, but the IRS commonly encounters highly questionable transactions. These transactions promise reduced taxable income, inflated deductions for personal expenses, the reduction or elimination of self-employment taxes, and reduced estate or gift transfer taxes. These transactions commonly arise when taxpayers are transferring wealth from one generation to another. Questionable trusts rarely deliver the tax benefits promised and are used primarily as means of avoiding income tax liability and hiding assets from creditors, including the IRS. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.

If you have been targeted by these scams, you should contact the Federal Trade Commission and use their “FTC Complaint Assistant” at If you have any questions regarding the above information, please do not hesitate to contact us.

Disclaimer: The information contained in this publication is intended solely to provide general guidance on matters of interest for the personal use of the reader, who accepts full responsibility for its use. In no event will Fishman, Block + Diamond, or its partners, employees, or agents, be liable to you or anyone else for any decision made or action taken in reliance on the information in this website or for any consequential, special, or similar damages, even if advised of the possibility of such damages.