12 Common Tax Return Scams To Avoid

By Mark Di Vincenzo. May 7th 2016

Did you know that if you worked at all this year the federal government probably owes you money? Yeah, the IRS doesn't want you to know this, but you're probably eligible for tax credits or rebates. But you need to file a form and submit personal information.

No, you don't. This type of scam is one that the Internal Revenue Service asked people, especially in the South and Midwest, to look out for in 2011. In this particular scam, some unscrupulous tax preparer or a person who passes himself off as a tax preparer convinces a victim that she is missing out on a rebate or tax credit to which she is really not entitled. Most tax preparers are honest and provide a good service, but some will charge taxpayers for bogus advice.

This type of crook perpetrates just one tax-related scam. Unfortunately, there are many others. The IRS releases an annual list of the 12 most common tax scams by taxpayers and preparers. There are so many scams that one year's list often looks much different than the year before and the year after. The following is the 2011 list from the IRS.

1. Hiding Income Offshore

Taxpayers try often to evade income taxes by hiding income in offshore banks and brokerage accounts or by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or insurance plans.

2. Identity Theft And Phishing

Identity theft is self-explanatory. Thieves can use someone else's personal information to file a fraudulent tax return and collect a refund. Anyone who believes his or her personal information has been stolen and used for tax purposes should immediately contact the IRS Identity Protection Specialized Unit at 1 (800) 908-4490.

Phishing, which is one of the most common tax scams, often occurs during tax season and involves crooks trying to pass themselves off as IRS agents or tax preparers to trick others into giving them personal and financial information. Phishing often involves the use of phony e-mails, websites and even social media accounts. Information about a suspicious e-mail or an IRS Web site that does not begin with http://www.irs.gov should be forwarded to the IRS at phishing@irs.gov.

3.Preparer Fraud

This is the scam that invites taxpayers to surrender their personal information or file a fraudulent form. These scammers also often charge way too much for filing legitimate returns and will demand a portion of their clients' refunds. Taxpayers should choose carefully when hiring a tax preparer. Make sure yours has a preparer tax identification number.

4.Filing False Or Misleading Forms

The IRS exposes scams in which people file false or fraudulent tax forms to substantiate fraudulent returns and ill-gotten tax refunds. For instance, phony information on a Form 1099 Original Issue Discount (OID) document can be used to claim false withholding credits to legitimize erroneous refund claims.

5.Making Frivolous Arguments

This covers a lot of scams that the IRS calls "outlandish claims." One claim is that paying taxes is voluntary. Another is that the 16th Amendment to the Constitution was never ratified. Others include the argument that wages are not income and the argument that the Form 1040 violates the Fifth Amendment right against self-incrimination. These arguments have been tested in court and dismissed.

6.Nontaxable Social Security Benefits With Exaggerated Withholding Credit

Some taxpayers report nontaxable Social Security benefits with excessive withholding. When they do this, it results in no income reported to the IRS on the tax return. Often both the withholding amount and the reported income are incorrect. This can result in a $5,000 penalty.

7.Abuse of Charitable Organizations And Deductions

This scam takes two forms. In one, the scammer moves assets or income to a supposedly tax-exempt organization, but retains control over those assets. The better known scam involves taxpayers exaggerating or overvaluing what they donate to charities.

8.Abusive Retirement Plans

The IRS reported that it often sees abuse of Individual Retirement Accounts (IRSs), particularly Roth IRAs, where people will move properties or common stock to a Roth at way below their true value to circumvent the annual contribution limit.

9.Disguised Corporate Ownership

This scam involves a scammer setting up a shell company to disguise the true ownership or the nature of his finances. This is essentially money laundering to under-report income or to avoid filing a tax return.

10.Zero Wages

Employers file W-2 forms to verify an individual's income from wages. A dishonest employee then claims the original form was wrong and files a "corrected" W-2 form (Form 4852), reducing or zeroing the amount he earned. Filing this form fraudulently may result in a $5,000 penalty.

11.Misuse Of Trusts

Many trusts offer excellent tax benefits, but many illegally hide assets from creditors, including the IRS. The IRS says this has become an increasingly popular tax scam, and it is investigating many suspicious trusts.

12.Fuel Tax Credit Scams

Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But others wrongly claim it, and they face a $5,000 penalty.

When it comes to scams, there are no winners. Scammers are often caught and face fines or jail time. The rest of us are often left paying higher taxes to make up for the revenue shortfall every year.

Sources

IRS

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