Tax Tip of the Week | No. 347 | The 2016 IRS Dirty Dozen

Tax Tip of the Week | March 23, 2016 | No. 347 | The 2016 IRS Dirty Dozen

The 12 most egregious tax scams of the year….“We are working hard to protect taxpayers from identity theft and other scams this filing season,” says Internal Revenue Service Commissioner John Koskinen. “We urge taxpayers to help protect themselves from scams – old and new.”To tell the old from the new and the clever from the mundane, the service again this year offers its Dirty Dozen scams. Here they are, in reverse order:1. ‘I don’t owe taxes because…’  “Promoters of frivolous schemes,” the IRS says, “encourage taxpayers to make unreasonable and outlandish claims even though they are wrong and have been repeatedly thrown out of court.” True, you can take your case to the legal system, but don’t try hiding behind many of the whimsical arguments that taxes are too high, wrongly levied or unconstitutional. The penalty for filing a “frivolous” return losing one of these spats: $5,000.2. Gimme shelter. The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them: “Everyone should be on the lookout for people peddling tax shelters that sound too good to be true,” from those involving foreign banks or companies to dream-come-true beachfront property in some sunny, faraway land. Increasingly, the wrong overseas LLC or LLP can land you right in JAIL.3. Faking a living. “Don’t invent income to erroneously qualify for tax credits, such as the Earned Income Tax Credit,” the IRS warns. “Taxpayers are sometimes talked into doing this by scam artists.” Sometimes by their own sense of adventure and derring-do, too, along with the nagging little idea that nobody in the government is truly watching.4. No credit, big problem. Generally, taxpayer clients stop listening when they hear the monetary benefit of something like the fuel tax credit and never hear how it’s a benefit generally not available to most. “Taxpayers should also avoid misuse of the research credit,” the IRS notes in this entry. “Improper claims generally involve failures to participate in or substantiate qualified research activities and/or satisfy the requirements related to qualified research expenses.”5. Inflationary issues. This entry on the Dirty Dozen must be one of the oldest dodges in return prep: “Taxpayers should avoid the temptation of falsely inflating deductions or expenses on their returns to underpay what they owe or possibly receive larger refunds,” says the IRS. And, of course, one special villain is the EITC.6. Uncharitable charities. Ever have a client who wrote a check to UNICHEF? How about one who eagerly clicked a donation to the American Human Society? “Be on guard against groups masquerading as charitable organizations,” the IRS says. “Contributors should take a few extra minutes to ensure their hard-earned money goes to legitimate and currently eligible charities.” So we can’t deduct our fifty bucks to Shave the Children?7. Free money! Amazing, really, how taxpayers keep falling for the promise of giant (see “falsely inflated”) refunds obtained by any shady preparer. “Be wary of anyone who asks taxpayers to sign a blank return, promises a big refund before looking at their records or charges fees based on a percentage of the refund,” the IRS advises. Like we said, amazing.8. Casting abroad net. The recent string of successful enforcement actions against offshore tax cheats – and the financial organizations that help them – prove it’s a bad bet to hide money and income offshore. Taxpayers are best served by coming in voluntarily and getting caught up on their tax-filing responsibilities, according to the IRS. The service offers the Offshore Voluntary Disclosure Program to enable people to catch up on their filing and tax obligations – since starting in 2009; it has netted more than $8 billion in otherwise-lost revenue.9. Rotten apples. “The vast majority of tax professionals provide honest, high-quality service,” the IRS concedes in this entry. “But there are some dishonest preparers who set up shop each filing season to perpetrate refund fraud, identity theft and other scams.” Please have your PTIN and credentials out for inspection.10. Gone phishing. Only after you enter the last numerals of your checking account number and hit SEND do you realize that the e-mail came from “IRS.com” and that the official seal of the Internal Revenue Service does not feature the face of Krusty the Clown. You’ve just been hooked by phishing, fake e-mails or Web sites looking to steal personal information. The IRS never sends taxpayers an e-mail about a bill or refund out of the blue; tell your clients never to click on one!11. One ringy-dingy. Phone calls from criminals impersonating IRS agents remain an ongoing threat to taxpayers and surged recently as scam artists threaten taxpayers with police arrest, deportation and license revocation, among other things. (Not that these thieves are always the brightest: Last season they even called the home of the commissioner of the Connecticut Department of Revenue Services.)12. What’s in a name? Identity thieves not only top the IRS Dirty Dozen but they also continue to aggressively file fraudulent returns using someone else’s info. In fiscal year 2015, the IRS initiated 776 ID-theft related investigations, which resulted in 774 sentencings. One thief got more than 27 years, or roughly three years for each digit in a phony Social Security number.

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