Each year, the IRS releases a list called the “Dirty Dozen” that outlines the most common tax-related IRS scams, including shortcuts and loopholes that aren’t worth the risk. By making yourself familiar with the list, you’ll be less likely to fall victim to tax scams and fraud when you file your income taxes.
1) Identity Theft
Identity theft is number one on the IRS scams list for a reason. In 2014, the IRS reported that 1000 consumers called the Federal Trade Commission every day to report acts of identity theft. To prevent identity theft, the best thing you can do is file your tax return as early as possible. Each social security number can only be used once; filing early prevents criminals from using yours to file a fake return.
2) Phone Scams
Phone scams are one of the fastest growing tax scams. The IRS will not call you regarding your tax return. However, criminals will call and impersonate IRS agents, demanding immediate payment. These calls can be very aggressive in an attempt to bully you into giving out information — not just your social security number, but also your credit or debit card details. Do not give out any personal information over the phone to anyone claiming they’re calling from the IRS.
3) Phishing Scams
Phishing is defined as an attempt to acquire sensitive information by sending an email from an account impersonating an official communication. Criminals use phishing to try and get information such as usernames, passwords, credit card numbers, and other personal items from unknowing taxpayers.
To combat this issue, be wary of emails asking for confidential information, and be sure to log out of websites with sensitive information. Also, always double-check the actual email address the communication is coming from. Often, the name that shows up looks official, but the email address is not. For example, the email name could say “IRS Compliance,” but the email address is something like firstname.lastname@example.org.
4) Return Preparer Fraud
Tax preparer fraud is an unfortunate issue we see each year and one that Liberty Tax takes very seriously. As part of their efforts to combat the issue, the IRS added a provision in the 2015 PATH Act that increased the penalties for tax preparers who “engage in willful or reckless conduct.”
Internally, Liberty Tax has created controls that examine tax returns filed from our franchise offices before the returns are submitted to the IRS or the state. Liberty Tax also has a Chief Compliance Officer tasked with overseeing an internal audit division that monitors anomalies in returns and sends alerts when there is activity that needs to be addressed.
5) Offshore Tax Avoidance
It is not illegal to hold cash, investments, or brokerage accounts in foreign countries. However, there are strict requirements for reporting offshore assets, including the Report of Foreign Bank and Financial Accounts (FBAR). There are severe penalties if the IRS determines that offshore accounts and investments are being used to evade the Internal Revenue Service. If you have offshore assets, it’s very important you know your tax obligations, or you can face serious repercussions.
6) Inflated Refund Claims
Criminals will often pad their tax returns so they can get a larger refund. There are many different ways to inflate a refund, including claiming false Social Security benefits and false claims for education credits, such as the Earned Income Tax Credit (EITC) and the American Opportunity Tax Credit. There is a penalty of up to $5,000 for using this tax scam.
7) Fake Charities
There are many requests for charitable donations during the year and especially around the holidays. This can be especially true around Giving Tuesday, the first Tuesday after Thanksgiving, a relatively new “holiday” that encourages people to give to charities and non-profits. Unfortunately, there are requests online, by phone, and even door-to-door for donations to what seem like worthwhile causes, but they may not be.
Before you give away your hard-earned money, be sure to check that the charity is real, especially if you’ve never heard of it. To aid in this process, the IRS has created a database of Qualified Charitable Organizations. Although not all charities will be listed here, the list can serve as a great resource. As an added bonus, the donations to the charities on this list are tax deductible.
8) Falsely Padding Deductions on Returns
Number eight on the list is falsely claiming deductions on a tax return to increase the amount of a tax refund. Fraudulently inflating deductions is illegal and can result in prosecution. If you’re in doubt about what deductions you can claim, consider hiring a tax preparation service.
9) Excessive Claims for Business Credits
Deductions aren’t the only part of a tax return that can be falsely padded. Business claims and expenses can be inflated, too, and to do so is just as illegal. Examples include falsely reporting amounts of mileage, personal purchases, and research credits. Most of these credits are not available to all taxpayers, so it’s important to claim only the credits that apply to your business.
10) Falsifying Income to Claim Credits
Some people falsify their income in order to claim more credits. This includes adjusting income amounts to make the taxpayer eligible to receive the Earned Income Tax Credit (EITC). This credit is available on a sliding scale, so the amount of income could be adjusted to receive the maximum credit. Falsely reporting these amounts can lead to individuals not only being responsible for paying back their refunds, but also for paying penalties and interest.
11) Abusive Tax Shelters
It is illegal to create tax shelters simply for the purpose of avoiding tax liability. This can include forming a Limited Liability Corporation (LLC) or a Limited Liability Partnership (LLP). When done fraudulently, these business types can hide taxable goods and income. Tax evasion is very different from financial planning.
12) Frivolous Tax Arguments
In February 2016, the IRS released a document entitled “The Truth about Frivolous Tax Arguments,” which outlines claims and the IRS’ responses to individuals who argue that they should not be responsible for paying taxes. Usually, these arguments are based on alleged religious or moral grounds. The penalty for claiming these arguments without merit is $5,000 or more.