The 2019 IRS Dirty Dozen

March 29, 2019 3:00 PM

As if this season didn’t have enough problems, scammers are hard at work making life difficult for preparers and taxpayers alike – though making it easy in a way for the IRS to compile this year’s Dirty Dozen tax scams.

These common scams may crop up anytime but many peak during filing season. The best IRS advice? “Don’t fall prey.”

E-mail symbol printed on a piece of paper hooked on a fishing hook. Phishing and data protection concept.

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Phish tales

Kicking off the annual Dozen is a warning of the ongoing threat of internet phishing scams that lead to tax-related fraud and ID theft. Taxpayers, businesses and tax pros need to be alert for a continuing “tricky and clever” surge of fake emails, text messages, websites and social media attempts to steal personal information.

Watch out for emails and other scams posing as the IRS, promising a big refund or personally threatening people. Don’t open attachments or click on links in emails.

Concept of Customer Support liar with long nose

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Dial P for phony

Tax-time phone scams find aggressive criminals posing as IRS agents to steal money or personal information via phone scams or “vishing” (voice phishing). Beginning early in the filing season, the IRS generally sees an upswing in scam phone calls (often robo-calls) threatening arrest, deportation or license revocation if the victim doesn’t pay a bogus tax bill. These con artists may have some of the taxpayer’s information, including their address, the last four digits of their Social Security number or other details. These types of scams have cost 14,700 victims a total of more than $72 million since 2013.

What’s in your name?

Despite what the agency terms “a steep drop in tax-related identity theft in recent years,” the IRS continues to caution that the scam remains serious. Tax-related ID theft occurs when someone uses a stolen Social Security number or ITIN to file a fraudulent return claiming a refund – and thieves constantly strive to find a scheme that works. Once their ruse begins to fail as taxpayers become aware of their ploys, they change tactics. Business filers should be aware that cybercriminals also file fraudulent 1120s using stolen business identities.

The profession’s rotten apples

“Choose tax preparers carefully,” says the IRS, and with good reason: Tax reform has propelled more taxpayers than ever to a paid pro to prepare their returns this year and a vibrant minority of dishonest preparers operate each filing season perpetrating refund fraud, ID theft and other scams. Look for a preparer who’s available year-round, the IRS advises taxpayers, and ask to see the PTIN.

Oh the money you’ll have

Look out for promises of inflated tax refunds, a common scam tactic during filing season. Con artists promising overly large refunds – using such tools as fictitious rebates, benefits or tax credits – frequently prey on older Americans and low-income taxpayers and those who don’t have a filing requirement. Scam artists can use flyers, advertisements, phony storefronts or word-of-mouth to attract victims. They may even make presentations through community groups or churches. They may also file a false return in their client’s name, and the client never knows that a refund was paid.

Magic money

Schemes involving falsifying income and creating bogus documents again make the Dozen, as the IRS warns about schemes involving falsifying income, including the creation of bogus 1099s. Con artists commonly use this trick as well as related scams designed to get taxpayers to erroneously claim undeserved credits such as the Earned Income Tax Credit.

The IRS also cautions taxpayers to avoid getting caught up in scams disguised as a debt payment option for credit cards or mortgage debt, a scheme usually involving the filing of a 1099-MISC and/or bogus financial instruments such as bonds, bonded promissory notes or worthless checks.

Hot air

Falsely inflated deductions or credits on returns often crop up as crooked tax preparers overstate deductions such as charitable contributions, medical or business expenses or the EITC and other credits. Often by the time the IRS contacts the taxpayer about these problems, the promoter or preparer is long gone.

Cons for kids

Disasters, charitable causes and the goodness of most taxpayers are low-hanging fruit for scammers masquerading as charitable organizations -- a frequent scam on the Dirty Dozen list. Using a deduction as bait, these fake charities often lure victims into making ineligible donations, ultimately leaving the unsuspecting donor in the lurch. Be wary of charities with names that are similar to familiar or nationally known organizations.

How to cheat in business without really trying

Improperly claiming various business tax credits is a common scam used by unscrupulous tax preparers. Two credits often targeted for abuse are those for research and fuel taxes: Improper claims for the R&D Credit generally involve a failure to participate in or substantiate qualified research activities and/or a failure to satisfy the requirements related to qualified research expenses; the Fuel Tax Credit is generally limited to off-highway business use or use in farming and is unavailable to most taxpayers.

Over there

Failure to report offshore funds remains a crime -- and an entry on this year’s list. After IRS efforts on offshore issues in recent years, many taxpayers have already voluntarily disclosed their participation in these schemes; the IRS conducted thousands of offshore-related civil audits that resulted in the payment of tens of millions of dollars in unpaid taxes and has pursued criminal charges leading to billions of dollars in criminal fines and restitution.

Numerous individuals have been identified as evading U.S. taxes by attempting to hide income in offshore banks, brokerage accounts or nominee entities then accessing the cash using debit cards, credit cards or wire transfers. Others have used foreign trusts, employee-leasing schemes, private annuities or insurance plans.

Lies, damn lies and frivolous tax arguments

Does the First Amendment allows taxpayers to refuse to pay taxes on religious or moral grounds. Are the “employees” subject to federal income tax those who work for the federal government? Is only foreign-source income taxable? In each case: NO.

Frivolous tax arguments like these remain a perennial among the Dozen. Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish legal claims to avoid paying their taxes. As the IRS reminds people time and again, these arguments have been tossed from courts.

When good tax tools go bad

Abusive tax shelters, trusts, conservation easements make this year’s list as abusive tax-avoidance schemes – along with their crooked promoters. Three variations of these schemes – abusive trusts, abusive micro-captive insurance shelters and abusive syndicated conservation easements -- are featured in the final installment of this year’s Dozen. The three all start with a legitimate tax-planning tool that is improperly distorted almost always by a promoter to produce benefits that are too good to be true and ultimately seriously compromise the taxpayer.