Last Friday, the Internal Revenue Service announced the conclusion of its annual “Dirty Dozen” list of common tax scams. The annual list highlights various schemes that taxpayers may encounter throughout the year, many of which peak during tax-filing season. We urge you to stay alert and use caution when viewing and responding to income tax related e-mails or telephone requests, or when receiving tax advice as these scams can be sophisticated and take many different forms as detailed below. 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
Phishing – Phishing is a scam typically carried out with 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. It is important to keep in mind the IRS does not initiate contact with taxpayers by emails, text messages, or social media channels, to request personal or financial information. The IRS has posted various phishing scams and example emails and fake websites online that can help you protect yourself from phishing – IRS Phishing and Online Scams.
Pervasive Telephone Scams – These are aggressive and threatening phone calls from criminals impersonating IRS agents demanding a debit card, credit card, or wire transfer to pay income taxes; if refused, they are then threatened with police arrest, deportation, or revocation of a business or driver’s license. For more information on how to handle these scams, please see our previous client memo – IRS Warns of Phone Scams.
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.
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 identify theft. For tips about choosing a preparer, details on preparer qualifications, and information on how and when to make a complaint, visit IRS web page – Need someone to prepare your tax return?
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 – Search for Charities, 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, contribute by check or credit card is another way that provides documentation of the gift.
False Promises of “Free Money” from Inflated Refunds – Scammers use flyers, advertisements, phony store fronts, 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.
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.
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 – How Do You Report Suspected Tax Fraud Activity?
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.
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.
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 on-going 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 http://www.ftc.gov/. If you have any questions regarding the above information, please do not hesitate to contact us. You may also view a copy of this and other FBD tax-related memos on our website under PUBLICATIONS/Client Memos – http://www.fbco.com/publications/memos