The 2016 “Dirty Dozen”: The IRS List of Tax Schemes & Scams to KnowPatricia McCrystal
Feb. 29, 2016
Every year the IRS publishes a list of twelve common tax schemes and scams called the “Dirty Dozen.” Choosing February for the annual release date of this list is probably no coincidence – although tax payers can be susceptible to the scams on this list at any time throughout the year, tax season provides a heightened environment for tricky gimmicks as taxpayers look for resources like online programs or hiring others to file their taxes.
Even if someone else files your taxes for you, it is the taxpayer who is ultimately responsible for any misdealings on their tax returns. Knowing and understanding the following “Dirty Dozen” tax schemes could save you from falling prey to any seedy swindlers this tax season as you prepare your 990T for your self-directed IRA assets.Identity Theft
– In the context of tax returns, scammers can use your personal information to fraudulently file a tax return and claim a refund.
How to avoid it: Take steps to keep your personal information safe and secure. If you believe you are at risk for identity theft, you can contact the IRS Identity Protection Specialized Unit to make a report (visit IRS.gov
Callers may pretend to be IRS representatives and try to steal your identity or your money. These same scammers can sometimes send emails to victims to try and support their fraudulent calls. According to Forbes
, “Over the past two years, nearly 4,550 victims have collectively paid over $23 million to scammers posing as IRS officials.”
How to avoid it: If you get a phone call from someone claiming to be from the IRS and you don’t believe you have an outstanding tax issue, call the IRS at 1.800.829.1040. If you get a phone call from someone claiming to be from the IRS and you know you don’t owe taxes, report the incident to the Treasury Inspector General for Tax Administration (TIGTA) at 1.800.366.4484 (Forbes.com
is a scam where victims receive emails or links to fake websites which try to steal personal information. Often the emails will ask for specific personal information or will clickbait you into installing spyware or other malware on your computer that can to steal your personal or financial information.
How to avoid it: As Forbes.com
says, “The IRS doesn’t initiate contact with taxpayers by email to request personal or financial information, so don’t click on or respond to these kinds of emails. If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), you can report it by forwarding it to firstname.lastname@example.org. Also be careful with emails purporting to be from companies like TurboTax, where a bogus email or a fake website poses as a legitimate site in order to get you to disclose your personal or financial information. When in doubt, assume it’s a scam.”Return Preparer Fraud
. Some crooked tax preparers may encourage taxpayers to claim unlawful credits, deductions, or exemptions to increase refunds.
How to avoid it: Taxpayers should only hire preparers who sign the returns they prepare, and enter their IRS Preparer Tax Identification Numbers (PTINs) to prove their legitimacy and provide a way to find them. Remember that no matter who prepares your taxes, if there is fraudulent information on your tax return, you will be penalized.Hiding Money or Income Offshore
. Rarely a month passes without another breaking news story about a Wall street billionaire or politician hiding income in offshore brokerage accounts in an attempt to evade U.S. taxes. For all tax payers, there are strict reporting requirements for offshore assets including FBAR (Report of Foreign Bank and Financial Accounts) filings. Failure to report and disclose those accounts could lead to penalties and fines.
How to avoid it: Pay attention to reporting requirements. Perform your due diligence and make sure your self-directed IRA is held with an accredited provider, since they will be in charge of your IRA’s bookkeeping. If you need to make a disclosure because you failed to report in the past, you may want to consider the Offshore Voluntary Disclosure Program (OVDP), where you may be able to catch up on filing and payment requirements and avoid fines and prosecution (Forbes.com
)Inflated Refund Claims
. When preparing your tax returns, scam artists may promise free inflated refunds. The most prominent inflated refund tactics include refunds derived from fake Social Security benefits and false claims for education credits, the Earned Income Tax Credit (EITC), and the American Opportunity Tax Credit.
Inflated refund claims (whether instigated by yourself or the person who prepared your returns) can result in penalties. Some scam victims have lost federal benefits (such as Social Security benefits, veteran’s benefits or low-income housing benefits) after filing tax returns that claimed false income amounts.
How to avoid it: Make sure your tax returns always truthfully reflect your earned income and include no falsified information, whether prepared by yourself or a tax professional.Fake Charities
. Fake charities take advantage of people’s good intentions to steal their money and/or identity. There is an upswing in this types of crime after disasters, when community members are looking for ways to make donations and help out.
How to avoid it: Donate to recognized charities using check or credit card whenever possible, as this allows you to retain documentation. Giving out personal information (like your Social Security number) is never necessary in order to obtain a receipt for your charitable donation, so if the charity asks for this type of information, it could be a red flag.Falsely Padding Deductions
. Taxpayers may legally claim deductions on their tax returns for things like education, mortgage interest, and charity. Exaggerating these types of deductions can lead to penalties and prosecution.
How to avoid it: Stay honest with the amount of business miles you traveled, how much you donated to charities, and depreciation rates. Don’t falsify deductions and you’ll stay in the clear of IRS penalties.Excessive Claims for Business Credits
. Claiming excessive business credits to reduce your taxes is illegal, and may subject you to penalties and interest. The IRS is particularly wary of fraud involving fuel tax credit and research credit, so don’t falsify these credits if you want to stay off of IRS radar.Falsifying Income To Claim Tax Credits
. Refundable tax credits (including Earned Income Tax Credits and the Additional Child Tax) require earned income in order to qualify. These credits inspire some taxpayers (and crooked preparers) to lie about income in order to claim the credit.
How to avoid it: Taxpayers who falsify income to claim tax credits will have to pay back the illegal refunds (including interest and penalties) and may face criminal prosecution, so stay honest with your tax returns.Abusive Tax Shelters
. Abusive tax shelters can involve simple trust arrangements, offshore tax schemes, and the use of multiple pass-through companies (like Limited Liability Companies (LLCs) and Limited Liability Partnerships (LLPs)) to hide ownership of the taxable income and/or assets. Checkbook IRAs are a self-directed IRA structure that can draw particular attention from the IRS because of the sometimes complicated reporting responsibilities that are passed from the IRA provider to the IRA account holder.
How to avoid it: You can’t legally avoid taxation by creating multiple layers of companies or trusts or by manipulating the ownership of assets, so don’t fall for schemes promoted by advisors who claim you can permanently avoid taxation by using their shelters and/ or products. Make sure your self-directed IRA is held with an accredited account provider, and if you do own a Checkbook IRA that operates a pass-through company, make sure you understand your responsibilities for reporting the assets held within the Checkbook IRA.Frivolous Tax Arguments
. “Frivolous tax arguments” include a myriad of arguments that can result in a fine on your tax return and additional penalties, including prosecution. These arguments include refusal to pay taxes on religious or moral grounds, or that only foreign-source income is taxable, among others.
How to avoid it: The IRS is not sympathetic to arguments against paying your taxes, and chances are they have heard every argument in the book since its establishment. The best way to avoid any complications or fines is to simply pay your taxes on time every year!