2015’s dirty dozen tax scams

Phone scams, phishing, and identity theft topped this year’s IRS list of the “dirty dozen” tax scams, which the IRS has been releasing, one scam at a time, since Jan. 22. The one-scam-a-day approach allowed the IRS to explore each one in more detail. Here is the complete list: 

1. Phone scams.
2. Phishing.
3. Identity theft.
4. Return preparer fraud.
5. Hiding income offshore.
6. Inflated refund claims.
7. Fake charities.
8. Filing false documents to hide income.
9. Participating in abusive tax shelters.
10. Falsifying income to claim tax credits.
11. Excessive claims for fuel tax credits.
12. Frivolous tax arguments.

According to the IRS, the most serious scams this year are phone scams, in which criminals call intended victims impersonating the IRS. Many times, the callers disguise the number they are calling to look like an IRS number and may threaten the target of the scam with arrest, deportation, or license revocation.

To protect themselves, taxpayers should be aware the IRS will never call to demand immediate payment; call about taxes owed without first mailing a bill; call to demand payment without the opportunity to question or appeal; require use of a specific payment method, such as a prepaid debit card; ask for credit or debit card numbers over the phone; or threaten to bring in local police or other law-enforcement groups to arrest someone for not paying (IR-2015-5).

Another scam that continues to appear high on the list is “phishing,” in which taxpayers get unsolicited emails trying to obtain financial or personal information. A taxpayer who receives a suspicious email should send it to phishing@irs.gov. “The IRS won’t send you an email about a bill or refund out of the blue,” said IRS Commissioner John Koskinen (IR-2015-6).

Third on the list is tax-related identity theft, which the IRS defines as when someone uses a taxpayer’s stolen Social Security number to file a tax return claiming a fraudulent refund. Although the IRS has introduced more effective screening and detection systems that are designed to detect identity theft before it issues a refund, it admitted this scam is still a major problem. To protect taxpayers who have already become victims, the IRS has issued about 1.5 million identity protection personal identification numbers (IP PINs), which are six-digit numbers assigned to identity theft victims with resolved cases to use when filing their federal tax returns to avoid delays in filing returns and receiving refunds (IR-2015-7).

Return preparer fraud involves “dishonest preparers who set up shop each filing season to perpetrate refund fraud, identity theft and other scams” (IR-2015-8). The IRS warned taxpayers to be wary of “unscrupulous preparers who prey on unsuspecting taxpayers with outlandish promises of overly large refunds.” Taxpayers can become victims of these fraudulent preparers, who do not understand taxes or who mislead people into taking incorrect credits or deductions. The IRS provides a number of tips to help taxpayers choose competent preparers, including checking what the preparer’s credentials are, making sure the preparer will be available after April 15, and ensuring that the taxpayer’s refund is deposited into the taxpayer’s account, not the preparer’s. The IRS says to avoid preparers who base their fees on a percentage of the refund or promise larger refunds than other preparers.

Hiding income offshore, which is a major focus of IRS enforcement efforts, is the next tax scam the IRS addressed (IR-2015-9). “Taxpayers are best served by coming in voluntarily and getting their taxes and filing requirements in order,” Koskinen said. As the IRS explained, there are legitimate reasons that taxpayers have foreign accounts, but these accounts trigger reporting requirements. The IRS offers a number of programs, including the Offshore Voluntary Disclosure Program, for taxpayers to come into compliance with these requirements.

Closely related to return preparer fraud is the sixth scam—inflated refund claims, in which unscrupulous preparers lure unsuspecting taxpayers with promises of “outlandish refunds” (IR-2015-12). These tax cheats promise large refunds based on fictitious rebates, credits, and refunds. They often include claims for tax credits that taxpayers are not entitled to, such as education credits, the earned income tax credit (EITC), or the American opportunity tax credit. The IRS reminds taxpayers that they are responsible for what is on their return, even if someone else prepares it, and can be assessed penalties and interest as well as additional tax.

The next scam is fake charities. Taxpayers are cautioned to check the IRS’s website for whether a charity is bona fide and qualifies for deductible contributions (IR-2015-16). This online IRS service is called the Exempt Organizations Select Check. Fake charities often use names similar to well-known organizations and may set up fake websites. They also can be used for identity theft purposes. When large-scale natural disasters occur, these fraudulent organizations tend to increase. Taxpayers should not make any contributions without first checking on the organization.

Filing false documents to hide income, the eighth scam, includes schemes in which tax preparers or taxpayers themselves prepare “corrected” Forms W-2 or 1099 reporting zero income (IR-2015-18). The IRS warns that the courts have uniformly rejected these types of claims and that making them can expose taxpayers to significant penalties and possibly imprisonment.

Participation in abusive tax shelters came in at No. 9 (IR-2015-19). Abusive tax shelters are defined as schemes using multiple flowthrough entities to evade taxes. They often use limited liability companies, limited liability partnerships, international business companies, foreign financial accounts, offshore credit or debit cards, and multilayer transactions to conceal who owns the income or assets. The IRS also mentions the misuse of trusts and captive insurance companies among the types of transactions taxpayers should avoid. As in some of the other scams, the IRS warns that participating in these transactions can result in significant penalties and interest and “possible criminal prosecution.”

Next is falsifying income to claim tax credits (IR-2015-20). This usually involves falsely claiming higher earned income to qualify for the EITC, which is a refundable credit. Once again, unscrupulous preparers often do this to get taxpayers larger refunds than they are entitled to. Even when taxpayers are unaware of these false claims, they are, as the IRS reminds again, responsible for what is on their tax return. They can be subject to significant penalties, interest, and possibly prosecution.

Excessive claims for fuel tax credits is a new entry on the list and lands at No. 11 (IR-2015-21). Fuel tax credits are for fuel used only in off-highway business use or farming—activities that do not involve many taxpayers. However, unscrupulous return preparers have enticed large groups of taxpayers to claim the credit erroneously. Under the law, fraudulently claiming this credit is considered a frivolous tax position subject to a $5,000 penalty, in addition to significant penalties and possible prosecution for the illegal scam.

The final “scam” is frivolous tax arguments, which the IRS warns taxpayers not to be talked into (IR-2015-23). Announcing the release today of the 2015 version of The Truth About Frivolous Tax Arguments, the IRS explained how the courts and the IRS have treated these arguments, which involve claims such as taxpayers’ not being subject to tax for religious or other reasons. “Taxpayers should be on the lookout for scam artists and scheme promoters peddling outlandish arguments,” Koskinen said. In addition, the IRS reminded taxpayers that they would automatically be subject to the $5,000 penalty for frivolous tax positions.

—Sally P. Schreiber (sschreiber@aicpa.org) is a JofA senior editor.