The Internal Revenue Service (IRS) issued its annual “Dirty Dozen” list of tax scams, reminding taxpayers to use caution and protect themselves against these schemes. This year’s 12 common tax scams include:

1. Identity Theft

Identify theft occurs when personal information such as your name, Social Security number or other identifying information is used without your permission. In many cases, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.

2. Phishing

Phishing scams are typically carried out through unsolicited emails or fake websites that prompt taxpayers to provide valuable personal and financial information. The IRS will never request personal or financial information via email, text message, social media or any other form of electronic communication.

3. Return Preparer Fraud

To avoid refund fraud or identity theft, taxpayers are encouraged to use preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers.

4. Hiding Income Offshore

Several taxpayers evade U.S. taxes by:

  • Hiding income in offshore banks, brokerage accounts or nominee entities, using debit cards, credit cards or wire transfers to access the funds.
  • Employing foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

Be sure to comply with reporting and disclosure requirements to avoid penalties and fines.

5. “Free Money” from the IRS and Tax Scams Involving Social Security

Low-income individuals, the elderly and members of church congregations are often targeted by scammers, promising them refunds by filing a tax return with little or no documentation. Another tax scam involves Social Security, where scammers promise taxpayers non-existent refunds or rebates.

6. Impersonation of Charitable Organizations

Following major disasters, scam artists impersonate charities to get money or private information from taxpayers by using a variety of tactics, including:

  • Contacting people by telephone or email to solicit money or financial information for bogus charities.
  • Contacting disaster victims and claiming they are helping victims file casualty loss claims and obtain tax refunds.
  • Attempting to get personal financial information to steal the victims’ identities or financial resources.
  • Creating bogus websites to solicit funds for disaster victims.

7. False/Inflated Income and Expenses

Claiming unearned income or unpaid expenses to secure larger refundable credits could result in repaying the erroneous refunds, including interest and penalties. Additionally, some taxpayers are filing excessive claims for the fuel tax credit, which is considered a frivolous tax claim and can result in a $5,000 penalty.

8. False Form 1099 Refund Claims

To justify a false refund claim on a corresponding tax return, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount. Unqualified taxpayers who claim deductions or credits could be liable for financial penalties or face criminal prosecution.

9. Frivolous Arguments

Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying owed taxes. Check out this list of frivolous tax arguments that taxpayers should avoid.

10. Falsely Claiming Zero Wages

A Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. Filing this type of return may result in a $5,000 penalty.

11. Disguised Corporate Ownership

Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business. These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions, and facilitate money laundering and financial crimes.

12. Misuse of 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 to avoid income tax liability and hide assets from creditors.

If you are in need tax assistance, contact our dedicated Tax Group, with CPAs in Michigan, Houston and Ft. Lauderdale.