IRS Lists New “Dirty Dozen” Tax Scams

Five fresh tricks highlighted in this year’s annual IRS Dirty Dozen list of the most widespread tax scams: Internet ScamBusters #325

We all know about phishing, but that’s just one of a whole batch of tricks identified by the IRS in its annual “dirty dozen” list of the most common tax scams.

There are five newcomers to this year’s list — many of them the result of incorrect or misleading advice from tax preparers or bogus scheme promoters, and some of them just false information entered on tax returns.

Since it’s tax season, this week we take you through the full dirty dozen countdown.

Let’s check out…

IRS Lists New “Dirty Dozen” Tax Scams

As we all knuckle down to the disagreeable task of completing our annual tax returns, the IRS has released its latest list of the 12 most widespread tax scams to watch out for. They call it the “dirty dozen” and this year’s recently-published list includes five new scams, as well as some of the old-familiars, like phishing.

In fact, as in earlier years, most of the tax scams have more to do with tall tales told by disreputable tax advisers or straight fraud attempts by individuals than they do with tricks perpetrated by crooks who merely want to get hold of our personal financial details so they can steal our identities.

“If you use a professional,” says IRS Commissioner Mark Everson, “pick someone who is reputable.”

So, bearing that sound piece of advice in mind, here, in the order given by the IRS, are the 2009 “dirty dozen” tax scams (newcomers are marked with an asterisk):

1. Telephone excise refund

This special one-off (so far) refund covers the excise sum that appears on your monthly phone bill. But some individuals and preparers are trying to use it to write off the whole amount of their phone bills.

2. Roth IRAs

In this tax scam, properties or common stock are moved into the shelter of a Roth Individual Retirement Account (IRA) at way below their true value, circumventing the annual contribution limit — till the IRS spots it!

3. Phishing

In Scambusters’ view, this is always the number one tax scam, where crooks try to pass themselves off as the IRS, to trick you into giving them bank and other personal financial details. For more on phishing, see Phishing Scams: How You Can Protect Yourself, as well as NEW IRS Notice is Really a Phishing Scam, which is specifically on taxes.

4. Disguised corporate ownership

Bit obscure this one, but basically it refers to setting up a shell company to disguise the true ownership or the nature of your finances. They are used for money laundering, to under-report income or to totally avoid filing a tax return.

5. Zero wages

We first talked about this tax scam a couple of years back in our article Tax Scams: What You Really Need to Watch Out for.

Employers file W-2s showing an individual’s earnings, then the individual files a “corrected” W-2 reducing or zeroing the amount earned, claiming the original one was wrong.

6. Return preparer fraud

This is a catch-all for the array of tax scams used by disreputable preparers. They include “skimming” clients’ refunds or charging inflated fees. Oftentimes these preparers lure in their victims by promising huge refunds, which either don’t follow or are based on fraudulent returns.

7. American Indian employment credit

Two variations of this tax scam:

* Firms that employ Native Americans can claim employment credits but employees of the business can’t — but that doesn’t stop them from trying.

* Unscrupulous promoters tell Native Americans that they’re not subject to federal taxation, advising them to use a form W-8 BEN to claim exemption. Not true.

8. Trust misuse

Taxpayers transfer assets into special trusts they’ve been told offer tax benefits. Many don’t (the IRS is currently investigating more than 150 such trusts at the moment). Some genuine trusts are tax efficient — talk to a respected professional for advice.

9. Structured entity credits

Another obscure one. It’s a newcomer this year and refers to partnerships set up to own and sell things like state conservation easement credits and federal rehabilitation credits. The partnership then declares a total loss, which supposedly can be deducted from returns. In fact, the investments are not regarded as “valid” by the IRS and are not deductible.

10. Charitable deductions

In this tax scam, a taxpayer moves assets or income to a supposedly tax-exempt organization like a charity, but retains control over those assets. Not allowed. Another common and better known scam is the overvaluation of property donated to charities.

11. Form 843 tax abatement

A filer requests abatement of previously assessed taxes using IRS Form 843. Often, the scammer has not previously filed tax returns and the tax they are trying to have abated has been imposed through the IRS Substitute for Return program. Any request for abatement is obviously closely scrutinized by the tax people.

12. Frivolous arguments

This covers a whole bunch of tax scams based on what the IRS calls “outlandish claims” — things like the Sixteenth Amendment to the Constitution (relating to Congress’s power to collect taxes) was never ratified, that wages are not income, that paying taxes is voluntary or that Form 1040 violates the Fifth Amendment right against self-incrimination. These arguments have been tested in court — and thrown out!

So that’s the 2009 dirty dozen. But remember one important thing: They’re just what the IRS considers the most blatant scams. There are lots more to beware of.

For example, check out these earlier Scambusters articles on some other IRS scams and tax form scams.

Taxing Times: Steer Clear of the New IRS Scams

Phony Tax Form Scams

After all, paying taxes is painful enough for most of us without the tricksters taking us for an extra expensive ride. Sad to say but, if you plan to use someone else to prepare your taxes but can’t work with an established reputable professional, then you’re probably safer and better off doing it yourself.

As Commissioner Everson says: “Taxpayers should remember they are ultimately responsible for what is on their tax return, even if some unscrupulous preparers have steered them in the wrong direction.”

Next week we move to a more pleasant topic!

That’s all for today — we’ll see you next week.