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In February, the IRS published its annual "Dirty Dozen" listing of tax scams to caution taxpayers about problems they may face in this filing season. They range from self-inflicted—too good to be true—to situations where third parties prey upon the unsuspecting.
Several are fairly common and familiar, ranging from reporting income that was not earned in order to maximize refundable credit, claiming excessive fuel tax credits, or simply claiming deductions one did not incur. So are the time-worn tax protester arguments that have been thrown out by the courts. There are, however, several that are new and equally dangerous.
The first involves identity theft – where someone files a return with your name and social security number in order to obtain a fraudulent refund. This writer can tell you from the experience of his clients that these things are happening at an alarming rate and, quite frankly, that the IRS has not made a really firm respose to the cases he has seen, notwithstanding its claims to have a "robust screening process" in place. This problem has been the subject of many newspaper articles, and anyone who believes personal information has been stolen – such as where you receive a letter from the IRS that your return was previously processed – needs to visit the IRS Special Identity Theft page at www.irs.gov/identitytheft.
Second, there are an increasing number of "PHISHING" scams – unsolicited emails or fake websites that pose as IRS sites in order to lure victims to provide personal and financial information. Any unsolicited email claiming to be from the IRS or an organization linked to the IRS should be reported to email@example.com. The IRS does not initiate contacts with taxpayer by email or request personal or financial information in this fashion.
A third problem involves tax return preparer fraud. There are some "bad apples" out there, and it is important to make sure that your tax return preparer operates on the up-and-up. For 2012, every paid preparer needs to have a Preparer Tax Identification Number ("PTIN"), and enter it on the return being prepared. If your preparer does not enter one on the return, or does not also sign it, beware!
A fourth problem area involves attempts to hide income offshore, which have received a great deal of publicity due to the IRS Offshore Voluntary Disclosure Programs. This can include foreign accounts, nominee entities, credit cards issued by foreign banks, and a multitude of other approaches. While there may be legitimate reasons for maintaining financial accounts abroad, taxpayers have to be mindful of the many reporting requirements that need to be fulfilled, because the penalties for failing to do so – even in legitimate situations – are severe. The IRS is working on information exchange programs with virtually every foreign country, so that these accounts are being "discovered" every day. If you have or need to open any sort of foreign financial account, talk to your tax advisor abour your reporting obligations.
Finally, there are situations where corporations are created to obscure the true ownership of a business,and trusts are promoted to disguise asset transfers. There are legitimate uses of both, but promises that income can be reduced, deductions of personal expenses can be permitted, or estate and gift taxes can be reduced, must be viewed with great suspicion. Again, have any such plan reviewed by an experienced tax professional before you proceed.
As long as we have a federal income tax, there are going to be scams to deal with. Don't be a victim in 2012!
George Connelly is recognized as one of the leading federal tax litigators in the United States. His practice focuses on IRS audit, collection and criminal matters including civil and criminal tax litigation matters, for clients ...