12 Tax Scams to Avoid Like the Plague
Beware of these 12 tax scams during tax season.
Feb. 18, 2012 — -- Hawking or buying into blacklisted tax ideas can attract heavy fines or even prison. The IRS warns the public of the worst tax scams annually, now in Hollywood-style videos.
Here's what to avoid.
1. Identity Theft. The IRS has launched a comprehensive strategy against identify theft including reviews for false returns and help to victims of identity theft refund schemes. If you believe personal information has been used contact the IRS Identity Protection Specialized Unit immediately. Also visit the special identity theft page here. See Identity Thieves Target IRS Data.
2. Phishing. The IRS does not request personal or financial information by email. Phishing is unsolicited emails or fake websites prompting victims to cough up personal financial details. Report unsolicited emails that appear to be from the IRS or an IRS-linked organization. Send it to phishing@irs.gov. The IRS can help you protect yourself from email scams.
3. Return Preparer Fraud. Many taxpayers use preparers and most provide honest services. Yet a few skim client refunds, charge inflated fees or promise inflated refunds. Choose carefully. For advice, see Tips for Choosing a Tax Preparer.
4. Hiding Income Offshore. There are legitimate reasons for accounts abroad but key reporting requirements. Taxpayers who don't comply risk significant penalties and even prosecution. See Ten Things To Know About Offshore Bank Accounts.
5. "Free Money" From IRS & Tax Scams Involving Social Security. Advertisements for free money from the IRS target low income persons and the elderly. Many tax scams involve Social Security. Beware.
6. False/Inflated Income and Expenses. Claiming income you didn't earn or expenses you didn't pay to get refundable tax credits (like the Earned Income Tax Credit) can earn you extra taxes, interest, penalties and even prosecution.
7. False Form 1099 Refund Claims. Don't get involved in information return schemes or you may face penalties or even criminal prosecution.
8. Frivolous Arguments. Promoters may encourage unreasonable and outlandish tax claims. The IRS lists frivolous tax arguments that have been thrown out of court. See To Avoid Fate Of Wesley Snipes, Skip Tax Protester Arguments.
9. Falsely Claiming Zero Wages. Filing a phony information return is illegal. Typically, a Form 4852 (Substitute Form W-2) or a "corrected" Form 1099 tries to reduce taxable income to zero.
10. Abuse of Charitable Organizations and Deductions. Abuses of 501(c)(3) organizations include attempts to avoid tax or maintain control over donated assets. Some donations are highly over-valued. Some charities promise you can repurchase donated items.
11. Disguised Corporate Ownership. Third parties are improperly used to request employer identification numbers and form corporations to hide the real owners. Don't do it.
12. Misuse of Trusts. Despite legitimate uses of trusts in tax and estate planning, some transactions promise deductions for personal expenses, cuts in estate or gift taxes, etc. Such trusts rarely deliver.
Related Links:
Avoid IRS Hit List Of Tax Scams
5 Mistakes Your CPA Won't Tell You But Your Tax Return Will
Don't Be Fooled by Intuit Tax ID Scam
Robert W. Wood practices law with Wood LLP, in San Francisco. The author of more than 30 books, including Taxation of Damage Awards & Settlement Payments (4th Ed. 2009 with 2012 Supplement, Tax Institute), he can be reached at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.
