IRS: Beware of 'dirty dozen' tax scams

@CNNMoney February 16, 2012: 2:55 PM ET

NEW YORK (CNNMoney) -- As the tax season kicks off this year, the IRS is keeping an eye out for scam artists who steal identities, lie about charitable donations and hide income in offshore accounts, among other abuses.

The IRS released its annual list of "dirty dozen" tax scams on Thursday, outlining the most common ways taxpayers are cheating the system.

"Scam artists will tempt people in-person, on-line and by e-mail with misleading promises about lost refunds and free money," said IRS commissioner Doug Shulman. "Don't be fooled by these scams."

Here are the 12 scams to be most wary of this year:

1. Identity theft

A growing number of identity thieves are using other taxpayer's personal information to file fraudulent tax returns and claim undeserved refunds, the IRS warns.

In 2011, the agency stopped more than $1.4 billion in refunds from getting into the wrong hands, and it plans to weed out more identity thieves this year.

If you believe someone stole your personal information for tax purposes, call the IRS Identity Protection Specialized Unit at 1-800-908-4490.

2. Phishing

Scammers can steal your personal information from e-mails, phone calls, text messages or social media like your Facebook page. Some fake websites are also set up to dupe potential victims into giving out their information.

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If you see anything suspicious or receive a message from someone claiming to be from the IRS, don't open any attachments or click on links included in the e-mail. Instead, forward the message to the IRS at phishing@irs.gov.

3. Sketchy tax preparers

With about 60% of taxpayers expected to use professionals to prepare and submit their taxes this year, be careful about who you entrust with personal information.

There are many preparers out there who will take a portion of a client's refunds, charge more than they should for services and lure taxpayers to their offices by promising unattainable refunds.

Federal courts have issued hundreds of injunctions ordering tax professionals engaging in these scams to stop preparing returns, and the Department of Justice has issued many complaints against preparers as well.

This year, all paid preparers are required to have a Preparer Tax Identification Number (PTIN) so customers can verify that they are legitimate. Be wary if your preparer doesn't sign the return or put their PTIN on it, doesn't give you a copy of your return, promises unusually large refunds, charges a percentage of the refund amount as a fee, adds forms to the return you've never filed before, or encourages you to include false information on your return, the IRS says.

4. Hiding income offshore

Taxpayers who have an offshore bank account, brokerage account, credit card or even an offshore insurance plan, are urged to come forward voluntarily in order to limit the possibility of criminal prosecution.

As part of its ongoing crackdown on hidden offshore accounts, the agency announced another initiative this year that gives taxpayers a reduction in penalties -- and no jail time -- if they fess up to any undisclosed overseas accounts. Since starting the crackdown in 2009, about 30,000 individuals have come forward and voluntarily disclosed their offshore accounts.

5. No such thing as "Free Money"

Flyers and advertisements have been showing up in community churches claiming that taxpayers can file returns with little or no documentation and receive big amounts of money, the IRS said. These ads typically target low-income individuals and the elderly and often promise non-existent Social Security refunds or rebates.

Inevitably these returns get rejected by the IRS. But by the time that happens, the scam artists have already disappeared with the victims' money.

The IRS warned that intentionally filing incorrect returns can result in a $5,000 penalty.

6. Inflating income and expenses

Claiming income you didn't actually earn or expenses you didn't pay to boost credits and refunds is another common scheme taxpayers attempt. If the IRS catches you in the act, you could end up repaying the extra money you claimed, along with interest and penalties -- and, in some cases, you could even be subject to prosecution.

7. Filing false forms

Some scam artists are filing fraudulent forms with their returns that contain fabricated information in order to get fatter refunds.

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"Don't fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns," the IRS said. "If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution."

8. Picking a bone with the IRS

There are even people who charge money in exchange for advice on how to argue with the IRS in order to avoid paying taxes. The agency has a list of legal positions that have been "thrown out of court" and cannot be used against the IRS, including the argument that filing a tax return is voluntary and that the IRS must prepare a return for anyone who fails to file. So pick your fights carefully this tax season.

9. Falsely claiming zero wages

In an attempt to lower the amount of taxes they owe, some taxpayers file phony wage-related information returns instead of the required returns. This is typically done by filing Form 4852 (a substitute W-2 form) or a "corrected" Form 1099 to fraudulently lower a person's taxable income to zero.

10. Exaggerating charitable donations

It can be tempting to overvalue the items you give to charity when reporting them on a return -- especially for non-cash donations such as furniture or artwork -- but the IRS is keeping an eye out for suspiciously high-valued donations this year.

The agency is also looking out for taxpayers who abuse charitable deductions by temporarily donating money or items to tax-exempt organizations, just to shield the money from getting taxed.

11. Disguising corporate ownership

It's time to fess up to that business you own. The IRS is currently working with state authorities to identify corporations and other entities that are hiding ownership of a business.

Often these businesses are hidden because the true owner uses a third party with its own employer identification number, whose businesses or financial services can be used for the underreporting of income, fictitious deductions, money laundering, financial crimes and even terrorist financing.

12. Misuse of trusts

Beware of anyone that tries to convince you to transfer money into a trust in order to reduce your taxable income, deductions for personal expenses and/or estate taxes. The IRS has seen an increase in the number of taxpayers improperly using trusts -- especially private annuity trusts and foreign trusts -- to skip out on tax liabilities.

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"While there are legitimate uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes," the IRS said. "Such trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS." To top of page

 
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