Tax Schemes and Scams - The Dirty Dozen

Phishing Scams, Frivolous Arguments Top IRS List of Fraud Threats to and From Taxpayers As U.S. citizens scramble to get their financial affairs in order before the April 15th federal tax return deadline, fraudsters are readying to take full advantage with scams of all shapes and sizes.

To help taxpayers muddle unscathed through this season's onslaught, the Internal Revenue Service (IRS) just issued its 2008 list of "the 12 most egregious tax schemes and scams."

Most prominent on the list? Phishing. The IRS estimates that taxpayers have forwarded more than 33,000 scam e-mails to the agency to date, representing more than 1,500 different phishing schemes

A summary of the full list includes:

1. Phishing. This is when someone uses a fraudulent email, text message or phone call to trick unsuspecting taxpayers into revealing personal information. For example, emails claiming to come from the IRS may ask recipients to confirm their social security or bank account numbers in order to receive their refund. This information is then used to empty bank accounts or even steal identities. But the IRS does not initiate contact through email or phone, so any correspondence that isn't written on official IRS letterhead should be considered suspect.

2. Scams related to the Economic Stimulus Payment. Fraudsters are using President Bush's recently announced tax "rebates" as a way to lure U.S. citizens into revealing personal data. For instance, phone or email solicitations could claim that recipients are eligible for rebates but must provide their bank account numbers to get the payment; unwillingness to do so means they lose their eligibility. However, the only way to get a stimulus payment is to file a 2007 tax return. Any claims to the contrary are bogus.

3. Frivolous Arguments. Creative fraudsters are known to promote schemes that urge unsuspecting taxpayers to make "unreasonable and unfounded" claims to avoid paying the taxes they owe. Indeed, the IRS has a list of frivolous legal positions that taxpayers should stay away from under the threat of a $5,000 penalty. The complete list of frivolous arguments is on the IRS Web site at IRS.gov.

4. Fuel Tax Credit Scams. Some taxpayers, such as farmers and fisherman who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. Unfortunately, some unscrupulous individuals try to leverage the tax credit for nontaxable uses of fuel "when their occupation or income level makes the claim unreasonable." This type of scam has recently made its way onto the IRS list of frivolous tax claims and warrants a $5,000 fine.

5. Hiding Income Offshore. Another scam that continues to make the "Dirty Dozen" list is when U.S. taxpayers try to illegally hide income to avoid paying tax. These individuals may use offshore bank and brokerage accounts or offshore debit cards, credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance plans. The IRS continues to pursue taxpayers and promoters involved in such abuse.

6. Abusive Retirement Plans. Some taxpayers are even trying to misuse retirement plan benefits, such as Roth Individual Retirement Arrangements (IRAs), in that they look for ways to "avoid the limitations on contributions to Roth IRAs." Promoters of said bad practices may urge taxpayers to shift assets into a Roth; or in another example provided by the IRS, move a highly appreciated asset into a Roth IRA at cost value, which is below annual contribution limits even though the fair market value far exceeds the amount allowed.

7. Zero Wages. Another popular scheme to reduce the amount of tax due involves filing phony wage returns to replace legitimate returns. Here, the IRS says, Form 4852 (Substitute Form W-2) or a "corrected" Form 1099 is used as a way to improperly reduce taxable income to zero. This is also accomplished by submitting a rebutting statement. The IRS warns U.S. citizens to avoid such "temptations."

8. False Claims for Refund and Requests for Abatement. With this scam, individuals use Form 843, "Claim for Refund and Request for Abatement," to request an abatement of previously assessed tax. One of the most common reasons cited is "Failed to properly compute and/or calculate Section 83-Property Transferred in Connection with Performance of Service."

9. Return Preparer Fraud. According to the IRS, dishonest tax return preparers are more common than one might think. They make a living by skimming a portion of their clients' refunds and/or charging exorbitant fees. These fraudsters lure taxpayers in with promises of larger refunds. An example of such fraud involves filing fraudulent claims for refunds on items such as fuel tax credits to recover taxes paid in prior years.

10. Disguised Corporate Ownership. Forming "shell corporations" for the purpose of disguising the ownership of a business or financial activity is another common tax-evasion scheme. The IRS says these "anonymous entities" can be used to underreport income, not file tax returns, engage in listed transactions, launder money, perpetrate financial crimes and even finance terrorism.

11. Misuse of Trusts. Some fraudsters talk taxpayers into transferring assets into trusts to outsmart the taxation system. This occurs under the promise a reduction of income subject to tax, deductions for personal expenses and/or reduced estate or gift taxes. But that's not the case with all trusts, so taxpayers should enter such situations with their eyes open and under the advice of a trusted professional.

12. Abuse of Charitable Organizations and Deductions. When it comes to charitable organizations and deductions, the IRS says this type of misuse often takes the form of arrangements to "improperly shield income or assets from taxation, attempts by donors to maintain control over donated assets or income from donated property and overvaluation of contributed property." Taxpayers are also attempting to pass private tuition payments off as charity.

Suspected tax fraud can be reported to the IRS using IRS Form 3949-A, which is available for download at IRS.gov . The form and a detailed letter outlining the specifics surrounding alleged fraudulent activity should be mailed to: Internal Revenue Service, Fresno, California 93888. It's important to include specific details regarding who is being reported, the activity being reported, how the activity became known, when the alleged violation occurred, and the amount of money involved. Whistleblowers are not required to identify themselves. If they chose to disclose that information, it will be kept confidential.


About the Author

Karyn Murphy

Karyn Murphy

Contributing Editor

Karyn Murphy is a seasoned writer with experience spanning 20 years. She's spent most of that time in the high-tech field learning the ins and outs of every "next big thing" - from wireless fraud detection technology to Internet security applications. An evangelizer of safe technology use, Karyn has logged many hours with financial institutions discussing the customer impact of technology. Her background culminates in a unique perspective that brings together a nuts and bolts understanding of technology and how that technology is applied in the real world. Karyn holds a degree in Business Administration with concentrations in journalism and computer science from St. Bonaventure University.




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