IRS’s Dirty Dozen scams — 2019 edition

As it has done for several years now, the IRS issued an updated list of “Dirty Dozen” tax scams for 2019. For the third year in a row one of the biggest scams is phishing attempts. Phone scams also figure prominently, with criminals making threatening phone calls to innocent taxpayers.

Here are the 2019 Dirty Dozen:

Falsifying income and creating bogus documents (IR-2019-35): This scam involves two types of fraud. The first is falsifying self-employment or wage income to increase the amount of the earned income tax credit (EITC) and other refundable credits that require earned income to qualify. The IRS points out that falsely claiming a deduction or credit that you are not entitled to or falsely inflating income is a crime. Claiming an EITC you are not entitled to may affect your ability to claim the credit in the future. 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.

Inflating deductions and/or credits (IR-2019-36): This scam involves unscrupulous tax return preparers or taxpayers themselves who overstate deductions, including charitable contribution deductions, business expenses, or medical expenses, and claim credits that the taxpayer is not entitled to — e.g., the EITC or the child tax credit in order to get a bigger tax refund or lower their tax bill.

Promises of inflated refunds (IR-2019-33): Unscrupulous tax return preparers may lure 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 as are those who may not have an obligation to file a return. Be wary of return preparers promising larger refunds than competitors or providing refunds substantially larger than taxpayers usually see. Some prepare returns for these unsuspecting taxpayers and keep the refunds. The IRS also includes in this scam 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.

Tax return preparer fraud (IR-2019-32): The IRS cautions taxpayers to choose tax return preparers carefully. The Service notes that with recent tax legislation enacting many changes to the tax law, many taxpayers who may have prepared their own returns may choose to use a tax preparer for the first time. The majority of return preparers are honest, but some dishonest preparers operate each filing season and perpetrate refund fraud, identity theft, and other scams that hurt innocent taxpayers. “We encourage people to carefully choose who they trust with their most sensitive tax and financial information,” IRS Commissioner Charles Rettig said in a press release.

Identity theft (IR-2019-30): The IRS notes that identity theft remains on the list despite a lot of progress in fighting these scams. “The IRS and the Security Summit partners in the states and the private sector have joined forces to improve our defenses against tax-related identity theft, sharply reducing the number of victims,” Rettig said. “But we encourage taxpayers to continue to be on the lookout for identity theft schemes, including email phishing attempts and other tax scams.”

Phone scams (IR-2019-28): The IRS warned taxpayers to be vigilant against phone scams, noting that “aggressive criminals pose as IRS agents in hopes of stealing money or personal information.” The IRS called this scam vishing (voice phishing). “These calls can feature scam artists aggressively ordering immediate payment and making threats against a person. Don’t fall for these,” Rettig said.

Phishing (IR-2019-26): The IRS told taxpayers and tax practitioners to be wary of a continuing surge of fake emails, text messages, websites, and social media attempts to steal personal information. “Taxpayers should be on constant guard for these phishing schemes, which can be tricky and cleverly disguised to look like it’s the IRS,” Rettig said.

Charitable contribution scams (IR-2019-39): Fake charities often lure victims into making ineligible donations, ultimately leaving the unsuspecting donor out of pocket and without a charitable deduction. “Scam artists commonly use charities as a cover to lure honest people into providing money and sensitive personal information,” Rettig said. These scams often increase when a natural disaster occurs. Donors can check whether a charity is bona fide by looking it up on the Tax Exempt Organization Search, an IRS database that lists legitimate charities.

Improper claims for business credits (IR-2019-42): The IRS has listed this scam, which involves claiming research tax credits and fuel tax credits the taxpayer is not entitled to, for several years. As the IRS explains, to claim the research credit, taxpayers must meet stringent requirements of establishing a process of experimentation and must substantiate all expenses. The fuel tax credit is available for off-highway business use or farming, so most taxpayers do not qualify. Nonetheless, every year, taxpayers are enticed into making these bogus claims, which can subject them to IRS penalties.

Failure to report offshore funds (IR-2019-43): “Offshore evasion remains a primary focal point of overall IRS enforcement efforts,” Rettig said. Third-party reporting has reduced the number of people who are out of compliance, but hiding assets offshore still remains a problem and may result in criminal prosecution.

Frivolous tax arguments (IR-2019-45): The IRS said that “promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish legal claims to avoid paying their taxes.” These arguments are always thrown out in court. “Don’t be fooled by people citing dubious legal schemes to avoid paying taxes,” Rettig said. People who perpetrate these illegal scams may face criminal prosecution. Taxpayers may also be subject to a $5,000 penalty for making these claims in their tax return and the 75% fraud penalty. The IRS also noted that it has addressed these scams in depth in The Truth About Frivolous Tax Arguments.

Abusive tax shelters, trusts, and conservation easements (IR-2019-47): The IRS warned taxpayers to stay away from abusive schemes that tax cheats often promote. They include abusive trusts, abusive micro-captive insurance shelters, and abusive syndicated conservation easements. This is the first year that the IRS has included abusive trusts and conservation easements on the list. In earlier years, only abusive tax shelters were included.

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