Phone scams and phishing featured in 2018’s Dirty Dozen tax scams

By Sally P. Schreiber, J.D.

The IRS released its updated 2018 list of the top 12, or “Dirty Dozen,” tax scams on Tuesday. Like last year’s list, the biggest story this tax season was phishing attempts, with all types of taxpayers, businesses, and tax preparers being targeted. Another one of the Dirty Dozen that has been in the news frequently this filing season is phone scams, with taxpayers getting threatening calls from criminals, as well as other schemes.

Here are the Dirty Dozen:

1. Falsely padding deductions (IR-2018-54): The IRS described this tax scam as one in which unscrupulous tax return preparers overstate deductions including charitable contribution deductions, business expenses, and claiming credits that the taxpayer is not entitled to — e.g., the earned income tax credit (EITC) or the child tax credit.

2. Fake charities (IR-2018-47): Once again, the IRS warns taxpayers to beware of fraudsters masquerading as charities to take advantage of people’s goodwill, especially after a disaster. It warns people not to give out personal information to anyone especially credit card, Social Security, and bank account numbers. It advises people that fake charities often have names similar to reputable charities and may create fake websites to mimic them.

3. Improperly claiming business credits (IR-2018-49): For a number of years, the IRS has listed this scam, which includes claiming research tax credits and fuel tax credits the taxpayer is not entitled to. As the IRS explains, to claim the research credit, taxpayers must meet stringent requirements and need to document all expenses. The fuel tax credit is available to off-highway business use or farming, which means most taxpayers don’t qualify.

4. Tax return preparer fraud (IR-2018-45): The IRS warned taxpayers that, when choosing a tax preparer, to be on the lookout for tax return preparers who don’t understand taxes or trick people into taking credits or deductions they aren’t entitled to. The IRS noted that unscrupulous return prepares operate every filing season to perpetrate refund fraud, identity theft, and other scams.

5. Identity theft (IR-2018-42): The IRS said it has made significant progress combatting tax-return identity theft, but it still is enough of a problem to earn a spot on the list. The Service defines it as someone using a stolen Social Security number or taxpayer identification number to file a fraudulent return claiming a refund. This category also includes false Forms 1120, U.S. Corporation Income Tax Return, being filed fraudulently for businesses. The IRS says taxpayers and preparers should take the following steps to fight these attempts: use security software with firewall and anti-virus protections; avoid phishing emails, threatening phone calls, and texts from thieves and clicking on links or opening attachments in emails from unknown or suspicious sources; and take steps to protect personal data.

6. Phone scams (IR-2018-40): Reports of criminals impersonating the IRS and threatening arrest, deportation, or driver’s license revocation if the taxpayer doesn’t pay a phony tax bill are increasing. They often use altered caller ID to make it look like the call is coming from the IRS or another agency; and they give fake IRS titles and badge numbers to appear legitimate, as well as using the taxpayer’s name, address, and other personal information. A new twist on this scam involves criminals who file false tax returns using the taxpayer’s name and bank account information, followed by a phone call to get the taxpayer to send the scammer the money that was deposited.

7. Falsely inflating deductions (IR-2018-48): Unscrupulous tax return preparers may lure in unsuspecting taxpayers with promises of inflated tax refunds. People with no filing obligation, such as older people and low-income taxpayers, are often targeted by these scam artists, including those who have no filing obligation. Some prepare returns for these unsuspecting taxpayers and pocket the refunds. The IRS also included falsely filing returns claiming zero wages or purporting to correct a Form W-2, Wage and Tax Statement, or Form 1099 to show zero income.

8. Phishing schemes (IR-2018-39): Tax practitioners, taxpayers, and businesses should beware of phishing schemes, which use fake emails or websites to steal personal information. The scammers are increasingly targeting tax professionals, payroll professionals, human resources personnel, and schools.

9. Falsified income, fake Forms 1099 (IR-2018-55): This scam involves two types of fraud — the first is falsifying self-employment or wage income to increase the amount of the EITC and other refundable credits that require earned income to qualify. The second scheme involves the filing of fake Forms 1099-MISC, Miscellaneous Income, in which scammers tell taxpayers about a fictitious held-aside account for which the only way to redeem or draw on it is to use some form of made-up financial instrument such as a bonded promissory note that purports to be a debt payment method for credit cards or mortgage debt.

10. Abusive tax shelters (IR-2018-62): The IRS warned against using all types of abusive tax shelters, particularly those involving micro-captive insurance companies. This is the fourth consecutive year that the IRS has highlighted abusive micro-captive insurance company tax shelters on the list.

11. Frivolous tax arguments (IR-2018-58): An item that has been recurring on the list through the years is taxpayers, often on the advice of promotors, making spurious arguments that they are not subject to federal income tax. Three common arguments made are that the First Amendment allows taxpayers to refuse to pay taxes on religious or moral grounds, that only federal employees are subject to federal income tax, or that only foreign-source income is taxable.

12. Offshore tax cheating (IR-2018-64): This long-standing tax scam is defined as avoiding taxes by hiding money or other assets in unreported offshore accounts. Over the years, the IRS says, many people have been identified as attempting to evade U.S. taxes by hiding income in offshore banks, brokerage accounts, or nominee entities, which are then accessed using debit cards, credit cards, or wire transfers and various other schemes.

Sally P. Schreiber (Sally.Schreiber@aicpa-cima.com) is a JofA senior editor.

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