Beware of IRS’ “Dirty Dozen” Tax Scams

Every year, the Internal Revenue Service puts out a list of the worst tax scams and schemes that are pulled by either dishonest taxpayers, or in some cases, tax preparers.  Below are some excerpts from an article they put out which highlights the areas that are highest on their radar.

Tax schemes are illegal and can lead to imprisonment and fines for both scam artists and taxpayers. Taxpayers pulled into these schemes must repay unpaid taxes plus interest and penalties. The IRS pursues and shuts down promoters of these and numerous other scams.

The IRS urges taxpayers to avoid these common schemes:

Return Preparer Fraud

Dishonest return preparers can cause trouble for taxpayers who fall victim to their ploys. Such preparers derive financial gain by skimming a portion of their clients’ refunds, charging inflated fees for return preparation services and attracting new clients by promising refunds that are too good to be true. Taxpayers should choose carefully when hiring a tax preparer. Federal courts have issued injunctions ordering hundreds of individuals to cease preparing returns and promoting fraud, and the Department of Justice has filed complaints against dozens of others, which are pending in court.

To increase confidence in the tax system and improve compliance with the tax law, the IRS implemented a requirement that all paid tax return preparers register with the IRS and obtain a preparer tax identification number (PTIN), so tax preparers can no longer remain confidential when preparing a tax return for a fee.

Setting higher standards for the tax preparer community will significantly enhance protections and services for taxpayers, increase confidence in the tax system and result in greater compliance with tax laws over the long term.

This is an issue that I deal with all of the time in my business.  There are many tax preparers out there that will put whatever they need to on a tax return in an effort to increase the refund and therefore, offer a higher amount of refund than tax preparers who only take the legal deductions.  People need to be really careful here, because it is their signature going on the tax return.  Just because a tax preparer signs your return, that does not mean that you as the taxpayer are not responsible for the information filed.  At Shurek Accounting & Tax we will never allow you to put information on a return that is not supposed to be there.  This is not to say that we will not exhaust every effort possible to maximize your deductions and lessen your tax liability.  It means that we will require some sort of evidence for any deductions that we take, just in case you happen to be selected for audit sometime in the future and we need to justify those deductions to the IRS.


Hiding Income Offshore

The IRS aggressively pursues taxpayers involved in abusive offshore transactions as well as the promoters, professionals and others who facilitate or enable these schemes. Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks, brokerage accounts or through the use of nominee entities. Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or insurance plans.

IRS agents continue to develop their investigations of these offshore tax avoidance transactions using information gained from over 14,700 voluntary disclosures received last year. While special civil-penalty provisions for those with undisclosed offshore accounts expired in 2009, the IRS continues to urge taxpayers with offshore accounts or entities to voluntarily come forward and resolve their tax matters. By making a voluntary disclosure, taxpayers may mitigate their risk of criminal prosecution.



Phishing is a tactic used by scam artists to trick unsuspecting victims into revealing personal or financial information online. IRS impersonation schemes flourish during the filing season and can take the form of e-mails, tweets or phony Web sites. Scammers may also use phones and faxes to reach their victims.

Scam artists will try to mislead consumers by telling them they are entitled to a tax refund from the IRS and that they must reveal personal information to claim it. Criminals use the information they get to steal the victim’s identity, access bank accounts, run up credit card charges or apply for loans in the victim’s name.

Taxpayers who receive suspicious e-mails claiming to come from the IRS should not open any attachments or click on any of the links in the e-mail. Suspicious e-mails claiming to be from the IRS or Web addresses that do not begin with should be forwarded to the IRS mailbox:

This one here is 99% common sense.  If you get some unexpected monies from the IRS or some other taxing authority or anyone, please call us before you put the check into your bank account.  This is a real easy way for someone to get your bank account information.  Also, the IRS never, I repeat NEVER will email you looking for information.  I have been dealing with them on almost a daily basis for over five years now and I have never been able to get an email address out of one agent.  They do not do business that way.  If you receive an email from the IRS, do not respond!!  If you do receive one, please forward to the address listed above.


Filing False or Misleading Forms

The IRS is seeing various instances where scam artists file false or misleading returns to claim refunds that they are not entitled to. Under the scheme, taxpayers fabricate an information return and falsely claim the corresponding amount as withholding as a way to seek a tax refund. Phony information returns, such as a Form 1099 Original Issue Discount (OID), claiming false withholding credits usually are used to legitimize erroneous refund claims. One version of the scheme is based on a false theory that the federal government maintains secret accounts for its citizens, and that taxpayers can gain access to funds in those accounts by issuing 1099-OID forms to their creditors, including the IRS.


Nontaxable Social Security Benefits with Exaggerated Withholding Credit

The IRS has identified returns where taxpayers report nontaxable Social Security Benefits with excessive withholding. This tactic results in no income reported to the IRS on the tax return. Often both the withholding amount and the reported income are incorrect. Taxpayers should avoid making these mistakes. Filings of this type of return may result in a $5,000 penalty.


Abuse of Charitable Organizations and Deductions

The IRS continues to observe the misuse of tax-exempt organizations. Abuse includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property. The IRS also continues to investigate various schemes involving the donation of non-cash assets including situations where several organizations claim the full value for both the receipt and distribution of the same non-cash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions.


Frivolous Arguments

Promoters of frivolous schemes encourage people to make unreasonable and outlandish claims to avoid paying the taxes they owe. If a scheme seems too good to be true, it probably is. The IRS has a list of frivolous legal positions that taxpayers should avoid. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or IRS guidance.

This is a pretty interesting one as well.  I recommend clicking the link above and reading about some of these arguments as to why people do not have a legal responsibility to pay their taxes.  I know that I joke on my homepage about how it’s not against the law not to pay taxes, but that actually refers to the IRS only having 10 years to collect their monies from you.  Of course, in that time, they can levy all of your bank accounts, your property and garnish your wages.  The plain truth is, if you owe taxes, don’t just ignore them, they don’t just go away that easily.  If you do currently owe back taxes or even current ones, there are many ways to deal with the IRS to come up with comfortable repayment terms.  Please contact someone at our firm if you have questions about this or need some assistance.


Abusive Retirement Plans

The IRS continues to find abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers use to avoid the limits on contributions to IRAs, as well as transactions that are not properly reported as early distributions. Taxpayers should be wary of advisers who encourage them to shift appreciated assets at less than fair market value into IRAs or companies owned by their IRAs to circumvent annual contribution limits. Other variations have included the use of limited liability companies to engage in activity that is considered prohibited.


Disguised Corporate Ownership

Corporations and other entities are formed and operated in certain states for the purpose of disguising the ownership of the business or financial activity by means such as improperly using a third party to request an employer identification number.
Such entities can be used to facilitate under-reporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance with the law.


Zero Wages

Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS.

Sometimes fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme. Filings of this type of return may result in a $5,000 penalty.

This is another pretty obvious one.  If you try to change the W-2 or 1099 information that was filed on your behalf, you will get caught.  The IRS works on a matching system, which means that they match your W-2 amount to the amounts filed by your employer on both the W-2s that were filed and the quarterly payroll returns that they submit.  Also, they will match your 1099 amount with what your employer deducted on their tax return.  When one number does not match all others filed, audit!!  It’s probably not worth the $5,000 penalty.  It will cost a lot less for you to hire Shurek Accounting & Tax to work on your tax return and maximize the LEGAL deductions that you have available to you.

Misuse of Trusts

For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts.  While there are many legitimate, valid uses of trusts in tax and estate planning, some promoted transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means to avoid income tax liability and to hide assets from creditors, including the IRS.

The IRS has recently seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust arrangement.

Fuel Tax Credit Scams

The IRS receives claims for the fuel tax credit that are excessive. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But other individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim and potentially subjects those who improperly claim the credit to a $5,000 penalty.

How to Report Suspected Tax Fraud Activity

Suspected tax fraud can be reported to the IRS using Form 3949-A, Information Referral. The completed form or a letter detailing the alleged fraudulent activity should be addressed to the Internal Revenue Service, Fresno, CA 93888. The mailing should include specific information about who is being reported, the activity being reported, how the activity became known, when the alleged violation took place, the amount of money involved and any other information that might be helpful in an investigation. The person filing the report is not required to self-identify, although it is helpful to do so. The identity of the person filing the report can be kept confidential.

Whistle blowers also may provide allegations of fraud to the IRS and may be eligible for a reward by filing Form 211, Application for Award for Original Information, and following the procedures outlined in Notice 2008-4, Claims Submitted to the IRS Whistle blower Office under Section 7623.

What does all of this mean?  It means that if you think that you are going to try pulling the wool over the eyes of the IRS and fool them into believing that any illegal deductions are valid, odds are you are going to get caught.  With over 250 million taxpayers filing every year, just imagine how many times people have tried to cheat the system.  This is why the IRS hires additional agents every year.  Especially in these times of a down economy, people are trying whatever they think they can get away with to try to keep as much of their money as possible.

I’m surprised that there was no mention of the first-time home-buyer tax credit in the above article because there has been an excessive amount of fraud involving that credit.  They have a whole division set up to investigate and prosecute people trying to falsely claim that tax credit.  I’ve even read recently about several tax preparers that are now serving jail time because of falsely claiming the credit for their clients.

As always, please contact Shurek Accounting & Tax if you have a question about any of the above items, or feel free to leave a comment or question in the space provided below.


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