CARL WATTS & ASSOCIATES

March 03, 2014

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The Dirty Dozen Tax
Scams for 2014
The tax season is on everybody’s mind, and scammers make no exception.

Number one winner in the top twelve tax scams of the year is, the third year in a row, the infamous identity theft. It seems that con artists are particularly fond of stealing Social Security numbers and other personal information they need to file bogus tax returns and claim refunds.

It’s no wonder the IRS takes this issue very seriously and has made expanded efforts to better protect taxpayers and help victims. There is a dedicated page to this subject on the IRS website called Identity Protection where you can find all sorts of information on a variety of scenarios involving identity theft, ranging from contacting the IRS with a case of identity theft to providing tips to help keep your records safe.

If you believe you are at risk of identity theft due to lost or stolen personal information, you should contact the IRS immediately so the agency can take action to secure your tax account. You can call the IRS Identity Protection Specialized Unit at 800-908-4490.

The IRS has seen an increase in local phone scams across the country. Callers pretend to be from the IRS in hopes of stealing money or identities from victims.

These phone scams include many variations, ranging from instances where callers say the victims owe money or are entitled to a huge refund. Some calls can threaten arrest or a driver’s license revocation. Sometimes these calls are paired with follow-up calls from people saying they are from the local police department or the state motor vehicle department.


Phishing scams typically use unsolicited emails or fake websites that appear legitimate. Scammers lure in victims and prompt them to provide their personal and financial information. The fact is that the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.

False promises of “free money” from inflated refunds.  Keep in mind that you are legally responsible for what’s on your tax return, even if someone else prepares it. Scam artists often pose as tax preparers during tax time, luring victims in by promising large tax refunds. Taxpayers who buy into such schemes can end up penalized for filing false claims or receiving fraudulent refunds. Take care when choosing someone to do your taxes.

Scam artists use flyers, advertisements, phony store fronts and even word of mouth to throw out a wide net for victims. They may even spread the word through community groups or churches where trust is high.
Scammers prey on people who do not have a filing requirement, such as low-income individuals or the elderly. They also prey on non-English speakers, who may or may not have a filing requirement.


Return preparer fraud.  About 60% of taxpayers will use tax professionals this year to prepare their tax returns. Most return preparers provide honest service to their clients. But some dishonest preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.  Choose carefully when hiring an individual or a company to do your return. Only use a tax preparer that will sign your return and enter their IRS Preparer Tax Identification Number (PTIN).


Hiding income offshore.  While there are valid reasons for maintaining financial accounts abroad, there are reporting requirements. U.S. taxpayers who maintain such accounts and do not comply with these requirements are breaking the law. They risk large penalties and fines, as well as the possibility of criminal prosecution. The IRS has collected billions of dollars in back taxes, interest and penalties from people who participated in offshore voluntary disclosure programs since 2009. It is in the best interest of taxpayers to come forward and pay their fair share of taxes.



Impersonation of charitable organizations. You always need to be sure you donate to recognized charities. Following major disasters, it’s common for scam artists to impersonate charities to get money or personal information from well-intentioned people. They may even directly contact disaster victims and claim to be working with the IRS to help the victims file casualty loss claims and get tax refunds.

False income, expenses or exemptions.  Falsely claiming income you did not earn or expenses you did not pay in order to get larger refundable tax credits is tax fraud. This includes false claims for the Earned Income Tax Credit. Such taxpayers often end up repaying the refund, including penalties and interest or face criminal prosecution.

Additionally, some taxpayers are filing excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. But other individuals have claimed the tax credit although they were not eligible. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.

Frivolous arguments encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. While you have the right to contest your tax liabilities in court, no one has the right to disobey the law or ignore their responsibility to pay taxes.

Falsely claiming zero wages or using false Form 1099 is an illegal way to try to lower the amount of taxes owed. Typically, fraudsters use a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 as a way to improperly reduce taxable income to zero. The fraudster may also submit a false statement denying wages and taxes reported by a payer to the IRS.

Abusive tax structures often involve sham business entities and dishonest financial arrangements for the purpose of evading taxes. The schemes are usually complex and involve multi-layer transactions to conceal the true nature and ownership of the taxable income and assets. The schemes often use Limited Liability Companies, Limited Liability Partnerships, International Business Companies, foreign financial accounts and offshore credit/debit cards.


Form over substance are the most important words to remember before buying into any arrangements that promise to "eliminate" or "substantially reduce" your tax liability.  The promoters of abusive tax schemes often employ financial instruments in their schemes.  However, the instruments are used for improper purposes including the facilitation of tax evasion.

Misuse of trusts.  There are reasonable uses of trusts in tax and estate planning. However, questionable transactions also exist. They may promise reduced taxable income, inflated deductions for personal expenses, the reduction or elimination of self-employment taxes and reduced estate or gift transfer taxes.  These trusts rarely deliver promised tax benefits. They primarily avoid taxes and hide assets from creditors, including the IRS.

The IRS reminds taxpayers that tax scams can take many forms beyond the “Dirty Dozen,” and people should be on the lookout for many other schemes.

Be safe and come back to our Newsletters for more news and useful information.
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