Every year the IRS releases a list of the top 12 scams perpetuated by or against American taxpayers. Here are the top 12 for this year:
1. Identity Theft
Identity theft is one of the worst scams being perpetrated against innocent taxpayers by criminals. Identity thieves obtain a victim's Social Security number and use it to file a forged tax return and claim a refund. Since 2008, the IRS has identified more than 460,000 taxpayers who have been affected by identity theft. For details on how to protect yourself from IRS identity theft, see "Beware IRS Identity Theft Scams."
"Phishing" means using dishonest means to obtain someone's Internet passwords, Social Security numbers, or financial information. One of the latest forms of phishing is creation of fake websites that mimic the IRS e-Services online registration page. For details, see "Beware of Phony IRS Websites."
3. Return Preparer Fraud
Most tax return preparers are honest, but there are a few bad apples who defraud their clients. For example, a dishonest preparer may pocket a client’s refund or keep payments that were intended for the IRS. For details, see "Are Tax Preparation Services Any Good?"
4. Hiding Income Offshore
One method of avoiding tax that has long been used by some wealthy people is to hide income offshore--that is, in a foreign country. For example, money may be deposited 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. There are several countries that serve as "tax havens" that specialize in helping people hide their money. It's perfectly legal to keep money in a foreign country. However, you are required to report any account worth more than $10,000 to the IRS each year. Failure to do so can result in fines, penalties, and even jail time.
5. “Free Money” from the IRS and Tax Scams Involving Social Security
The IRS reports that flyers and advertisements for "free money from the IRS" have been appearing in community churches around the country. These flyers suggest that a low-income taxpayer can file a tax return with little or no documentation and get a refund. There are also several scams involving Social Security. For example, scammers have been known to lure the unsuspecting with promises of non-existent Social Security refunds or rebates.
6. Impersonating Charitable Organizations
One of the ugliest tax scams is where criminal con artists impersonate charities to get money or information from taxpayers in the wake of a natural disaster. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.
7. False/Inflated Income and Expenses
Some people inflate their incomes and/or expenses to obtain larger refundable tax credits--that is, tax credits that result in IRS payments even if the taxpayer owes no taxes. One of the most abused credits is the Earned Income Tax Credit, a refundable credit for low-income taxpayers. However, it is not just the poor who engage in such illegal behavior: Some farmers and other taxpayers who use fuel for off-highway business purposes make inflated claims to maximize their fuel tax credits, or obtain the credit when they were ineligible to receive it.
8. False Form 1099 Refund Claims
Another scam is to make refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to them by issuing 1099-OID forms to the IRS. In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return. Obviously, this is illegal.
9. Frivolous Arguments
Tax protestors have devised many bogus arguments as to why the federal income tax is illegal and need not be paid. Any person who relies on such an argument is subject to an IRS penalty of $5,000. In addition, the IRS can not only require that you pay your taxes due, but can also impose a 20% accuracy-related penalty and a whopping 75% civil fraud penalty. If substantial fines and penalties aren't bad enough, you can also be criminally prosecuted for tax fraud. For details, see "Tax Protesters Never Win."
10. Falsely Claiming Zero Wages
One way to lower the amount of income taxes owed is to file a phony information return. 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.
11. Disguised Corporate Ownership
Some wealthy business owners set up phony corporations to disguise the true ownership of their business. These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in tax shelters, and facilitate money laundering and financial crimes. The IRS is working with state authorities to identify these entities and bring the owners into compliance with the law.
12. Misuse of Trusts
For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are legitimate uses of trusts in tax and estate planning, some highly questionable 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 of avoiding income tax liability and hiding assets from creditors, including the IRS. IRS personnel have seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses.