We're deep in tax season right now, and my local newspaper's Police Report is reflecting that, with numerous reports each week of people falling victim to tax scams. Our friends at the Internal Revenue Service don't like that, and in an effort to inform the public and reduce the number of victims, it has released a list of its "Dirty Dozen" tax scams.
Here's a quick overview of them. You can find more information on many of them online, and from the IRS itself. Note that some of them happen when outsiders approach you, some happen due to your hiring a shady tax preparer, some happen when you try to pull a fast one on Uncle Sam, and some happen without your being involved at all.
Phone scams: If you're called by someone claiming to work for the IRS, be very skeptical. The IRS won't call you about any matter without first having written to you to alert you. Scammers will impersonate IRS agents and may try to scare you with threats of arrest, penalties, deportation, and so on. Hang up and call the IRS on your own if you're worried about it.
Phishing: Phishing happens year-round, when dastardly types try to get your personal information by fooling you via fake (but seemingly real) emails or websites. (You might, for example, get an email that really seems like it's from a delivery company, asking you to click on a link for information about a delivery.) Phishing happens at tax time, too, such as via a fake email inviting you to click a link for information about money due to you. Know that the IRS doesn't initiate contact with you via email.
Identity theft: This one will take you by surprise when you file your tax return. You expect a refund, only to find out that someone else, using your Social Security number and probably some other identifying information, has filed a return in your name and has claimed your refund. The IRS is fighting this and other scams, but with its budget repeatedly shrunk by Congress in recent years, it's tough going. One way to avoid this scam is to file your return early, beating the scammers to it.
Return preparer fraud: There are thousands of tax preparers out there who would love to prepare and file your return for you. Most of them are honest, but some aren't. The scammers among them might engage in identity theft and other kinds of tax fraud. Remember that even when someone else prepares your tax return (and most taxpayers these days do use a preparer), you're the one responsible for what's in it.
Offshore tax avoidance: If you're trying to hide income and other funds outside the country, know that you're breaking the law. A better strategy is to come clean to the IRS, perhaps through its Offshore Voluntary Disclosure Program (OVDP). Otherwise, the IRS may come to you.
Inflated refund claims: This scam is one you might spot on flyers or ads, where you're promised a big tax refund by people who don't even know anything about you. These operators might ask you to sign a blank tax return that they'll then fill out for you, or might charge you steep fees, explaining that they're a small percentage of your refund. Beware.
Fake charities: This one is particularly cruel, as it preys on our good natures. It's when scammers set up fake charities to tug on our heartstrings and solicit donations. Many times, they'll bear a name that sounds very much like one you're familiar with. Always look closely and do a little digging before sending any money. It's often best to find the charities you support on your own, not by responding to come-ons.
Hiding income with fake documents: The 1099 forms we include with our tax returns reporting various income should be legitimate. Don't try to file a fake one that reports less income, and don't let any tax preparer do that for you. Remember this IRS warning: "Taxpayers are legally responsible for what is on their returns regardless of who prepares the returns." Oh, and by the way, many organizations that send you 1099 forms also send that information to the IRS.
Abusive tax shelters: Avoid tax shelters and tax-avoidance schemes, too. If it sounds too good to be true, it probably is -- and it's probably illegal, too. Feel free to consult a tax lawyer or enrolled agent for an informed opinion.
Falsifying income to claim credits: If you're knowingly or unknowingly mis-stating your income in order to claim some tax credits, rethink that decision. That can get you in big trouble with the law.
Excessive claims for fuel tax credits: Some bad tax preparers might try to talk you into improperly claiming fuel tax credits -- ones that are generally not applicable to most taxpayers. The IRS is on the lookout for these ploys, among others.
Frivolous tax arguments: Finally, don't fall for any arguments that you don't have to pay your taxes. Those who have tried that argument in court have failed. You can dispute what, exactly, you owe, but you can't get out of being responsible for taxes you owe. The IRS reminds us that the penalty for filing a frivolous tax return is $5,000.
That's the Dirty Dozen, so now that you're aware of them, do your best not to be a victim or perpetrator of any of them. A great way to start is by making sure you're using a good tax preparer. Ask around for recommendations and perhaps favor CPAs or enrolled agents.