Tax season is upon us once again and there are a number of tax scams preying upon people’s fears of making a tax return mistake or appeal to their desire to get a bigger refund. Every year, the IRS issues its list of the dirty dozen worst tax scams. These scams appear online, by email and in person. In some cases, taxpayers can’t even trust their tax preparers.
If you become a victim of a scam you can also find yourself in real trouble with the IRS. After the tax con artist has compromised your personal data and taken some, if not all, of your tax refund, you could face significant penalties and interest for not filing a proper tax return or not paying what you legally owe.
Here is a list of this year’s top tax tricks. Pay attention so you do not become a tax scam victim. This countdown concludes with the worst of them all.
Misuse of trusts
Trusts can be valuable legal arrangements to deal with many complex family, financial and tax issues. However, trusts designed solely to hide assets from the IRS are illegal. Beware of a trust that promises to reduce the amount of income subject to tax, offers deductions for personal expenses or claims to lower estate or gift taxes. Trusts can be complicated, so don’t take the word of a stranger offering to set up one that will reduce your tax bill. Find an attorney or other trained tax professional who can help you establish a proper, legal trust.
Abusive tax structures
This is a generally inclusive category for good reason. These types of tax schemes encompass multiple flow-through entities. Basically, reports the IRS, the tax avoidance involves various business arrangements – limited liability companies, limited liability partnerships and international business companies are among the most common – that utilize foreign financial accounts, offshore credit and debit cards, and other similar instruments.
Such schemes are helped by the financial secrecy laws of some foreign jurisdictions and the availability of credit and debit cards issued from offshore financial institutions. The IRS Criminal Investigation Unit targets not only the criminals who set up these elaborate schemes, but also the individuals who knowingly participate in abusive tax schemes.
The IRS refers to various claims to avoid filing and paying taxes as “frivolous arguments.” A popular claim is that return filing is voluntary. It’s not. In fact, the IRS has tougher penalties for not filing than it does for not paying taxes owed.
Then there’s the argument that wages, tips and other compensation received for personal services are not income. Please check the dictionary along with the tax code. Money received via whatever method is income. And it is called an income tax.
Others contend that the United States consists only of the District of Columbia, federal territories and federal enclaves – and only those U.S. citizens must file a return. The states and their residents that receive federal assistance disagree.
These are only a few of the frivolous tax arguments that anti-tax advocates use to encourage taxpayers to avoid filing and paying taxes. The IRS has a 63-page list of them that you should check before falling for these scams.
False income, expenses, exemptions
Most tax cheats report less income than they make, so their tax liability will be less. But in some cases, a taxpayer needs more money to get a tax break’s maximum benefit.
The IRS reports it regularly sees fraudulent income inflating by individuals seeking a refundable tax credit, such as the earned income tax credit, for which they otherwise don’t qualify. Credits prompt such unscrupulous acts because they are better tax breaks than deductions. A deduction lowers taxable income, while a credit lowers the actual tax bill dollar for dollar. Refundable credits, as the name indicates, allows filers who don’t owe tax to get a refund.
Other tax con artists file excessive claims for relatively uncommon tax breaks, such as the fuel tax credit. This is designed to help farmers and, similarly, taxpayers who use fuel for off-highway business purposes.
The key to avoid this common 2014 tax scam is to accurately report your taxable income and expenses. If you don’t, you could face interest on unpaid taxes, penalties that could be as much as $5,000 and possible criminal prosecution.
Bogus charitable organizations
The tax code offers benefits for philanthropic taxpayers. It does not, however, reward those who set up improper nonprofit groups or illegally donate to them. Unfortunately, when bad things happen, bad people take advantage, tax and otherwise. That’s why when there are significant natural disasters, con artists come out in droves.
They impersonate charities to get money or private information from well-intentioned taxpayers. And they use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.
Return preparer fraud
The IRS expects around 60 percent of taxpayers to use tax professionals this year to prepare and file their tax returns. In most cases, those tax return preparers provide honest service to their clients. But, as in any other business, there are unscrupulous tax pros.
Questionable return preparers have been known to skim off their clients’ refunds, charge excessive fees for return preparation services and attract new clients by promising guaranteed or inflated refunds.
Choose your tax pro carefully. Be wary of one who does not have a tax ID number from the IRS.
Other warning signs that your tax pro might not be working in your best interest include a requirement that you split the refund to pay his or her preparation fee, refusal to give you a copy of your return, addition of forms to your return that you had not seen before, and the preparer’s reluctance to put his or her signature on the return.