Every year, the IRS publishes an annual list of Dirty Dozen tax scams. Among the “worst of the worst” scams, phishing and phone scams particularly stand out. Here is the list for 2019:
Phishing is a very common scam where criminals try to steal financial information through fraudulent email, social media texts or websites. In many cases, all it takes is to click a link in a phishing email to install spyware on your computer that can report what sites you visit and what passwords you key in. Sometimes the email or website is set up to appear it is from the IRS, though it could also appear to be from a financial institution or other company.
Criminals may target tax, payroll and human resources professionals as well as individuals. For example, the criminals may pose as a business asking the recipient to pay a fake invoice, an employee seeking to change direct deposit information or someone the taxpayer knows requesting a wire transfer.
If a taxpayer or tax professional receives an email or social media text purporting to be from the IRS requesting financial information or other suspect requests, or if they are directed to a suspicious website, they can report it to [email protected].
To learn more, see IR-2019-26.
2. Phone Scams
Phone scams are phone calls from criminals who pretend they are IRS agents or representatives of private agencies collecting for the IRS. The callers may try to intimidate taxpayers with arrest, deportation, license revocation or any number of other threats in order to strong arm financial information out of them. The criminals may demand payment for a fake tax bill, often requesting payment by wire transfer, prepaid debit card or gift card. They may leave voice mail where they urge the taxpayer to call them back or face repercussions. Taxpayers cannot depend on caller ID to recognize these scammers, because they may alter their caller IDs, so the calls appear to be from the IRS or other legitimate agency.
To learn more, see IR-2019-28.
3. Identity Theft
Taxpayers should constantly guard against identity thieves. Though there has been a drop in identity theft in recent years, it is still bad enough to make the IRS Dirty Dozen list. Criminals can use your social security number and other information to file a tax return in your name in order to get your tax refund. Protect your passwords and beware of people trying to get your financial information through phishing and other means. In 2015, the IRS, states and private companies related to the tax industry created the Security Summit to work together in combating tax-related identity theft.
To learn more, see IR-2019-30.
4. Return Preparer Fraud
Tax preparers can be a godsend to taxpayers – unless they are scammers posing to be tax preparers. These criminals steal taxpayers’ financial information, identities, and refunds. About 53.5% of taxpayers used a paid tax preparer, and it is important that taxpayers know how to tell the difference between a legitimate professional and a scammer. A few tips you can relay to your clients is that they should:
- Look for a preparer who is available year-round.
- Ask if the preparer has an IRS Preparer Tax Identification Number (PTIN).
- Ask for some evidence of credentials. Backgrounds of legitimate tax preparers vary, but they should be able to show something credible.
- Check qualifications at the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications.
- Do not hire a preparer who asks for a percentage of their clients’ incomes in fees.
- Don’t give private financial information to a preparer when you are only trying to find out about services and fees.
- Do not sign an incomplete tax return.
- Do not hire a preparer who promises a much higher refund than other preparers.
5. Inflated Refund Claims
The maxim “if it appears too good to be true, it probably is,” applies to tax refunds as much as anything. If a preparer promised a higher refund than others, your client’s alarm bells should sound. Some of these preparers may keep the refunds for themselves or may falsify a return to claim zero income. These preparers may find their victims through advertising, community group word of mouth or temporary phony storefronts.
To learn more, see IR-2019-33.
6. Falsifying Income to Claim Credits and Filing False Documents
It’s not only a crime to report lower income than you receive. It’s also a crime to inflate income in order to receive tax benefits. The IRS warns against falsifying income and creating fake forms. Perpetrators who are caught must not only repay the amount of the credits, but they must also pay interest and penalties, and may also face criminal prosecution. The IRS outlines two types of offenses:
- Unscrupulous tax preparers may convince taxpayers to inflate their income in order to get a higher earned income tax credit (EITC) and other credits.
- Scammers may perpetrate tax evasion with a scheme that looks like a debt payment option for credit cards or mortgage debt and involves filing a false Forms 1099-MISC. The scammer tells the taxpayer that the appropriate method to draw on a fictitious “held-aside” account is to use some kind of financial instrument such as a bonded promissory note. But the financial instrument that is represented as being a debt payment method for credit cards or mortgage debt is actually fake. The scammer tax preparer gives the taxpayer a fake Form 1099- MISC that appears to be from a financial institution, usually one where the taxpayer had a relationship.
To learn more, see IR-2019-35.
7. Falsely Padding Deductions on Returns
It may be tempting to inflate deductions and expenses on a tax return, but taxpayers who file erroneous tax returns are much more likely to trigger audits. Taxpayers who overstate deductions such as charitable contributions and business expenses, or improperly claiming credits may face significant penalties.
To learn more, see IR-2019-36.
8. Fake Charities
Taxpayers should be aware that not all groups seeking money for a “good cause” are charities that are eligible for a tax deduction. Taxpayers should double check that the group they are considering is a legitimate charity before donating. If the group has a name similar to a nationally known organization, your clients should be particularly wary.
- To search on legitimate, tax-exempt charities, use the IRS’s Tax Exempt Organization Search.
- Ask the charity for their Employer Identification Number (EIN). Legitimate charities will be happy to provide it, and you can use it to verify their legitimacy through the IRS search tool.
To learn more, see IR-2019-39.
9. Excessive Claims for Business Credits
Taxpayers sometimes claim business credits to which they are not entitled. These may include:
- The fuel tax credit, which is generally limited to off-highway business uses such as farming. Most taxpayers are ineligible for this credit.
- The research credit, which is only available for qualified research expenses for qualified research activities.
To learn more, see IR-2019-42.
10. Offshore Tax Avoidance
The IRS is on high alert for offshore tax avoidance schemes where taxpayers hide money in offshore accounts. It’s fine to keep money in foreign accounts, but those who do so must meet IRS reporting requirements. Taxpayers who have not properly reported their offshore holdings have several options for addressing the noncompliance. Penalties can be severe for those who do not comply, so it is best to get right with the IRS as soon as possible.
To learn more, see IR-2019-43.
11. Frivolous Tax Arguments
Sometimes taxpayers use frivolous tax arguments to avoid paying their taxes. These arguments may be any number of things, but the IRS gives these examples:
- The First Amendment allows taxpayers to refuse to pay taxes on religious or moral grounds.
- The only “employees” subject to federal income tax are those who work for the federal government.
- Only foreign-source income is taxable.
The penalty for filing a frivolous tax return is $5,000, but it doesn’t stop there. Those who perpetrate illegal tax scams and taxpayers who use them could face criminal prosecution.
12. Abusive Tax Shelters
Promoters sometimes take legitimate tax structures and distort them to the extent that they result in tax evasion. These schemes can take three forms:
- Abusive trusts
- Abusive micro-captive insurance shelters
- Abusive syndicated conservation
Taxpayers should be aware that tax evasion is a criminal offense. Even if it does not result in criminal prosecution, taxpayers may face stiff penalties and interest.
Taxpayers are advised to view schemes to make money on tax shelters with a high rate of return with a healthy dose of skepticism. If taxpayers are offered big tax benefits in return for an investment, they should seek an opinion from a trusted and experienced tax professional.
To learn more, see our recent articles, Conservation Easements Make the IRS Dirty Dozen Tax Scam List, DOJ Worries Keeping You Up at Night? What to Do if You Already Invested in a Syndicated Conservation Easement and IR-2019-47.
Warn Your Clients
Tax preparers who want to best serve their clients will probably want to alert their clients to the IRS Dirty Dozen, so they do not inadvertently put themselves and their futures at risk.