Dirty Dozen top tax scams led by phishing schemes

By Sally P. Schreiber, J.D.

As it does every year during filing season, the IRS released its annual list of the top 12 Dirty Dozen tax scams, updated for the 2017 filing season. Anyone following the news this year and last will not be surprised that the No. 1 scam was phishing, which has affected tax preparers, company payroll and human resources departments, and individual taxpayers. Second is phone scams, which involve fraudsters impersonating the IRS, calling and threatening people to get them to pay amounts they may not even owe, and often asking for untraceable forms of payment. Here is the IRS’s list of this year’s top dozen worst scams.

1. Phishing schemes (IR-2017-15). Phishing schemes, which involve fake email or websites that trick taxpayers or practitioners into giving personal information (such as Social Security numbers, credit card numbers, or bank account numbers) and login or password information, leads the list of tax scams for 2017. These schemes have targeted tax practitioners, payroll and human resources departments, government agencies, and individual taxpayers. Be wary about clicking on any attachments or links in emails.

2. Phone scams (IR-2017-19). The IRS said the number of taxpayers receiving aggressive and threatening phone calls from criminals impersonating IRS agents increases during filing season. At this time of year, the IRS generally sees a surge in scam phone calls that threaten police arrest, deportation, license revocation, and other things. Taxpayers should guard against all sorts of con games that arise at any time and pick up during tax season. The IRS usually initiates contact with taxpayers by mail, not by phone, and says it would never threaten any of those things when attempting to collect taxes.

3. Identity theft (IR-2017-22). Tax-related identity theft, together with what the IRS calls the related scams of stealing personal and financial data from taxpayers or data held by tax practitioners, remains a top concern, although the IRS says it is making progress. The Security Summit Partners, consisting of the IRS, state tax agencies, and the tax preparation industry, have applied more safeguards against this crime this year and say they will continue to step up their efforts.

4. Return preparer fraud (IR-2017-23). The IRS warned taxpayers to be careful to avoid unscrupulous tax return preparers. Although the vast majority of tax preparers provide honest, high-quality service, some dishonest preparers set up shop each filing season to perpetrate refund fraud, identity theft, and other scams that hurt taxpayers. Be wary of preparers who promise overly large refunds. The IRS has a list of pointers taxpayers should follow when choosing a tax preparer, including the advice to never sign a blank return. Taxpayers are responsible for what is on their returns and should guard against significant penalties and interest as well as possible criminal prosecution for knowingly participating in a scam.

5. Fake charities (IR-2017-25). Scam artists set up fake charities to steal money and personal information from unsuspecting (and well-meaning) taxpayers. Many of these scammers use names that are similar to well-known charities or set up websites that look like legitimate charities; some fake charities prey on people after large natural disasters. Before donating their hard-earned money, the IRS suggests that taxpayers check the IRS website, Exempt Organization Select Check, to be sure they are giving to legitimate organizations.

6. Falsely inflating refund claims (IR-2017-26). According to the IRS, this scam takes many forms, from unscrupulous tax preparers contacting elderly or low-income taxpayers who normally don’t file and filing returns claiming inflated refunds for them (or stealing their identities and keeping any refund). It also involves people who normally file and receive refunds falling victim to scam artists who file returns for them claiming earned income tax credits (EITCs) or education credits or otherwise inflating deductions to get taxpayers larger refunds than they are entitled to. The IRS also mentions fake Forms W-2 or 1099 claiming zero wages or other income.

7. Excessive claims for business credits (IR-2017-27). The IRS mentioned specifically fuel tax credit scams and research tax credit scams. Fuel tax credits are credits for excise taxes paid on fuel, which may be exempt from tax in some cases and therefore eligible for the credit to reimburse taxpayers for nontaxable uses. One example is the use of fuel in farming or other off-road purposes. But, the IRS explains, most individual taxpayers do not qualify for such credits and should not be taken in by unscrupulous preparers who fraudulently claim the credit on taxpayers’ returns or who claim it as part of an identity-theft refund scheme. The IRS notes that claiming the fuel tax credit fraudulently may subject a taxpayer to a $5,000 penalty for making a frivolous claim.

The research tax credit is a credit for research activities that involve a process of experimentation. Many taxpayers claim the credit for activities that do not qualify or for which they lack proper substantiation of the research expenses, which can subject them to penalties.

8. Falsely padding deductions (IR-2017-28). This scam involves taxpayers falsely padding deductions, expenses, or claiming credits they are not entitled to. Included in the IRS’s list are overstating charitable contributions or business expenses, or falsely claiming credits, such as the EITC.

9. Falsifying income to claim tax credits (IR-2017-29). This scam involves reporting fraudulent amounts of earned income in order to qualify for certain tax credits, such as the EITC, which requires taxpayers to have income earned from a job or business to qualify for the credit. The IRS also mentioned a scam involving false Forms 1099-MISC, Miscellaneous Income. This scheme involves scammers telling 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. These scammers provide fraudulent Forms 1099-MISC that appear to be issued by a large bank, loan service, or mortgage company with which the taxpayer may have had a prior relationship, to further perpetrate the scheme. Scammers may also use Form 56, Notice Concerning Fiduciary Relationship, to assign fiduciary responsibilities to the lenders. 

10. Abusive tax shelters (IR-2017-31). For the third consecutive year, according to the IRS, it places abusive micro-captive insurance company tax shelters on its list of the top 12 tax scams. Although the Code permits captive insurance companies if they meet certain requirements and qualify as insurance, the abusive ones involve the following type of scheme. Promoters persuade owners of closely held entities to participate in arrangements that lack many of the attributes of genuine insurance: They insure implausible risks, fail to match genuine business needs, or duplicate the taxpayer’s existing coverages. Premiums may not be supported by underwriting or actuarial analysis, may be linked to a desired deduction amount, or may be much higher than premiums for comparable commercial coverage. The IRS noted that it had added these types of entities to the list of “transactions of interest” in Notice 2016-66.

11. Frivolous tax arguments (IR-2017-33). The IRS warned taxpayers not to be taken in by promoters of outlandish legal arguments to avoid paying their taxes that have consistently been thrown out of court. According to IRS Commissioner John Koskinen, “Taxpayers tangled up in these scams end up paying back taxes and often stiff penalties as well.” Some of the more common arguments that taxpayers have made are that taxpayers can avoid paying taxes on religious or moral grounds by invoking the First Amendment to the Constitution or that only federal employees are subject to federal income tax. Besides having to pay any unpaid taxes, plus penalties and interest, taxpayers may be subject to a $5,000 penalty for making a frivolous argument.

12. Offshore tax cheating (IR-2017-35). The IRS defines this tax scam as avoiding taxes by hiding money or other assets in unreported offshore accounts. It uses as an example of the types of schemes for evading U.S. taxes: attempting to hide income in offshore banks, brokerage accounts, or nominee entities, which are then accessed using debit cards, credit cards, or wire transfers. Other taxpayers use foreign trusts, employee-leasing schemes, private annuities, or insurance plans to evade tax.

The IRS noted that it was harder for taxpayers to hide these illicit activities now that worldwide reporting has become more widespread. It pointed to the success of two IRS programs for taxpayers to come into compliance: the Offshore Volunteer Disclosure Program and the Streamlined Disclosure program, which is aimed at taxpayers whose failure to disclose assets was nonwillful. Together, those programs have netted $10 billion in back taxes and penalties since 2009. Taxpayers who do not disclose these foreign assets or accounts risk significant penalties as well as possible criminal prosecution, the IRS warns taxpayers.

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

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