Income taxes are an unavoidable fact. Many people will try to avoid them or find shortcuts to exploit tax loopholes. This act is known as Tax Fraud. The IRS releases a list each year of the most common scams.  This list is called “The Dirty Dozen.”

You should know the 2016 Dirty Dozen so that you don’t become a victim to tax scams and fraud.

  1. Identity Theft

This is number one on the list for a reason. Criminals will stop at nothing to get their hands on the Social Security Numbers of others to illegally file a tax return. In 2014, the IRS reported that 1,000 consumers called the Federal Trade Commission every day to report acts of identity theft.  The best thing you can do to prevent this from happening is filing your return as early as possible. Each SSN can only be used once, so filing early can help prevent criminals from using yours to file.

  1. 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, but never give out any personal information, including your credit card and debit card information, over the phone.

  1. Phishing

Phishing is defined as an attempt to acquire sensitive information by sending an email from an account impersonating an official communication. Criminals try to get information such as usernames, passwords, credit card information and other personal items. Be sure to log out of websites with sensitive information and be wary of emails asking for confidential information.

  1. Return Preparer Fraud

Tax preparer fraud is an unfortunate issue that we see each year, and one that Liberty Tax takes very seriously. We’ve created internal controls that scrutinize the tax returns filed from our franchise offices before the returns are transmitted to the IRS or the state. We have 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.

  1. Offshore Tax Avoidance

This scam seems like something out of a Hollywood film, but make no mistake, it is real. It’s not illegal to hold cash, brokerage accounts or other investments in foreign countries. However if it is used to evade the Internal Revenue Service, it does hold severe penalty. There are strict requirements for reporting offshore assets including the Report of Foreign Bank and Financial Accounts (FBAR). If you have offshore assets, it’s very important that you know your tax obligations.

  1. Inflated Refund Claims

Who doesn’t want to receive a tax refund - the more the merrier, right? Criminals will often pad their tax returns so that they can get a larger refund back. There are many different ways to inflate a refund including false Social Security benefits and false claims for education credits, like the Earned Income Tax Credit (EITC) and the American Opportunity Tax Credit. Although it may appear that their refund check is larger, they’re actually just making their penalty larger. Criminals face a penalty of up to $5,000 for this tax scam.

  1. Fake Charities

Unfortunately, there are people who try to take advantage of the goodwill of others.  Throughout the year and especially around holidays, there are requests on the internet, phone and even door-to-door for donations to what seem like worthwhile causes. Be aware that donations do not require you to provide much of your personal information like your Social Security Number.

  1. Falsely Padding Deductions on Returns

Number eight on the list is falsely claiming deductions on a tax return to increase the amount of their return. Inflating deductions is illegal and can result in prosecution.

  1. Excessive Claims for Business Credits

Not only can deductions be falsely padded, so can business claims. These claims range from mileage to personal purchases, as well as 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 tax situation.

  1. Falsifying Income to Claim Credits

For example, someone may adjust their income so that they are 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. These mistakes lead to individuals not only being responsible for paying back the erroneous refunds, but also paying penalties and interest.

  1. Abusive Tax Shelters

It is illegal to create tax shelters simply for the purpose of avoiding tax liability. This can include forming Limited Liability Corporations (LLC) or Limited Liability Partnerships (LLP). These groups may hide taxable goods and income, and tax evasion is very different from financial planning.

  1. Frivolous Tax Arguments

The IRS released a document entitled “The Truth about Frivolous Tax Arguments.” This document outlines claims that certain individuals should not be responsible to pay taxes, often based on alleged religious or moral grounds. The penalty for taking these positions are $5,000 and possibly additional penalties.