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The Internal Revenue Service (IRS) has unveiled its latest list of notorious tax scams, which it calls the "Dirty Dozen":
- 1. Telephone excise tax refund abuse. Early filings show that some individuals have requested large and apparently improper amounts for the special telephone tax refund. For example, some taxpayers seem to be seeking a refund of their entire phone bills, rather than just the 3% long-distance excise tax. In some cases, tax preparers are filing improper requests for their clients. IRS is investigating potential abuses in this area and will take prompt action.
- 2. Abusive Roth IRAs. IRS says that taxpayers should be wary of advisers who encourage them to shift under-valued property to Roth Individual Retirement Arrangements (IRAs). For instance, some promoters have the taxpayer move under-valued common stock into a Roth IRA, circumventing the annual maximum contribution limit and allowing otherwise taxable income to go untaxed.
- 3. Identity theft. IRS says that it is aware of several e-mail identity theft scams (so called "phishing") involving taxes. Fraudsters send bank customers fictitious correspondence and IRS forms in an attempt to trick them into disclosing personal financial data. A typical e-mail notifies a taxpayer of an outstanding refund, urging him to click on a hyperlink and visit an official-looking Web site where he is asked to give his Social Security and credit card number. IRS emphasizes that it does not use e-mail to initiate contact with taxpayers. A taxpayer who has any doubt whether a contact from IRS is authentic can call 1-800-829-1040 to confirm it.
- 4. Disguised corporate ownership. IRS says that domestic shell corporations and other entities have been formed and operated in certain states to disguise the ownership of a business or financial activity. They are being used to facilitate income underreporting, non-filing of tax returns, listed transactions, money laundering, financial crimes and possibly terrorist financing.
- 5. Zero wages. In this scam, a Form 4852, Substitute Form W-2, or a "corrected" Form 1099 showing zero or little income is filed with a return. The taxpayer may include a statement rebutting wages and taxes reported to IRS by the payer or may refer to the paying company's refusal to issue a corrected Form W-2.
- 6. Return preparer fraud. Dishonest return preparers can cause many headaches for taxpayers who fall victim to their ploys. Such preparers derive financial gain by skimming a portion of their clients' refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. IRS says that taxpayers should choose carefully when hiring a tax preparer.
- 7. American Indian employment credit. In this scam, Native American employees reduce the income on their returns, citing an American Indian employment or treaty credit. Although businesses employing Native Americans or their spouses can claim such a credit, it is not available to employees. Unscrupulous promoters have also informed Native Americans that they are not subject to federal income tax and had them eliminate withholding by filing Form W-8 BEN, Certificate of Foreign Status of Beneficial Owner for U.S. Tax Withholding. Promoters have also sent e-mail with false IRS letterheads to solicit personal financial information in order to process their "non-tax" status.
- 8. Trust misuse. Unscrupulous promoters for years have urged taxpayers to transfer assets into trusts. They promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. However, some trusts do not deliver the promised tax benefits, and IRS is actively examining these arrangements. IRS says that taxpayers should seek the advice of a trusted professional before entering into a trust.
- 9. Structured entity credits. IRS says that promoters of this newly identified scheme set up partnerships to own and sell state conservation easement credits, and rehabilitation and other credits. The credits are the only assets and once they are fully used, investors receive a K-1 indicating the initial investment is a total loss, deductible on their return. IRS states that forming such an entity is not a viable business purpose; the investments are not valid; and the losses are not deductible.
- 10. Abuse of charitable organizations and deductions. IRS says it has observed an increase in the use of tax-exempt organizations to improperly shield income or assets from taxation. This can occur, for example, when a taxpayer moves assets or income to a tax-exempt supporting organization or donor-advised fund but maintains control over the assets or income, thereby obtaining a tax deduction without transferring a commensurate benefit to charity. Contributions of non-cash assets also continue to be an area of abuse, especially the overvaluation of contributed property. IRS also notes an upswing in private tuition payments being disguised as charitable contributions to religious organizations.
- 11. Form 843 tax abatement. This scam is involves a return filer requesting abatement of previously assessed tax using Form 843, Claim for Refund and Request for Abatement. Often the requesters have failed to file returns in the past and the tax they want abated has been assessed by IRS through the Substitute for Return Program.
- 12. Frivolous arguments. IRS warns taxpayers to be aware of frivolous arguments such as wages are not income and paying taxes is entirely voluntary.
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