Home » TAX FRAUD
Category Archives: TAX FRAUD
IR-2014-16: IRS Releases the “Dirty Dozen” Tax Scams for 2014; Identity Theft, Phone Scams Lead List
IR-2014-16, Feb. 19, 2014
WASHINGTON — The Internal Revenue Service today issued its annual “Dirty Dozen” list of tax scams, reminding taxpayers to use caution during tax season to protect themselves against a wide range of schemes ranging from identity theft to return preparer fraud.
The Dirty Dozen listing, compiled by the IRS each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns.
“Taxpayers should be on the lookout for tax scams using the IRS name,” said IRS Commissioner John Koskinen. “These schemes jump every year at tax time. Scams can be sophisticated and take many different forms. We urge people to protect themselves and use caution when viewing e-mails, receiving telephone calls or getting advice on tax issues.”
Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.
The following are the Dirty Dozen tax scams for 2014:
Tax fraud through the use of identity theft tops this year’s Dirty Dozen list. Identity theft occurs when someone uses your personal information, such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes. In many cases, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.
The agency’s work on identity theft and refund fraud continues to grow, touching nearly every part of the organization. For the 2014 filing season, the IRS has expanded these efforts to better protect taxpayers and help victims.
The IRS has a special section on IRS.gov dedicated to identity theft issues, including YouTube videos, tips for taxpayers and an assistance guide. For victims, the information includes how to contact the IRS Identity Protection Specialized Unit. For other taxpayers, there are tips on how taxpayers can protect themselves against identity theft.
Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure their tax account. Taxpayers can call the IRS Identity Protection Specialized Unit at 800-908-4490. More information can be found on the special identity protection page.
Pervasive Telephone Scams
The IRS has seen a recent increase in local phone scams across the country, with callers pretending to be from the IRS in hopes of stealing money or identities from victims.
These phone scams include many variations, ranging from instances from where callers say the victims owe money or are entitled to a huge refund. Some calls can threaten arrest and threaten a driver’s license revocation. Sometimes these calls are paired with follow-up calls from people saying they are from the local police department or the state motor vehicle department.
Characteristics of these scams can include:
- Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
- Scammers may be able to recite the last four digits of a victim’s Social Security Number.
- Scammers “spoof” or imitate the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
- Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
- Victims hear background noise of other calls being conducted to mimic a call site.
After threatening victims with jail time or a driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.
In another variation, one sophisticated phone scam has targeted taxpayers, including recent immigrants, throughout the country. Victims are told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting.
If you get a phone call from someone claiming to be from the IRS, here’s what you should do: If you know you owe taxes or you think you might owe taxes, call the IRS at 800-829-1040. The IRS employees at that line can help you with a payment issue – if there really is such an issue.
If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to the Treasury Inspector General for Tax Administration at 800-366-4484.
If you’ve been targeted by these scams, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add “IRS Telephone Scam” to the comments of your complaint.
Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.
If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to email@example.com.
It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS has information online that can help you protect yourself from email scams.
False Promises of “Free Money” from Inflated Refunds
Scam artists routinely pose as tax preparers during tax time, luring victims in by promising large federal tax refunds or refunds that people never dreamed they were due in the first place.
Scam artists use flyers, advertisements, phony store fronts and even word of mouth to throw out a wide net for victims. They may even spread the word through community groups or churches where trust is high. Scammers prey on people who do not have a filing requirement, such as low-income individuals or the elderly. They also prey on non-English speakers, who may or may not have a filing requirement.
Scammers build false hope by duping people into making claims for fictitious rebates, benefits or tax credits. They charge good money for very bad advice. Or worse, they file a false return in a person’s name and that person never knows that a refund was paid.
Scam artists also victimize people with a filing requirement and due a refund by promising inflated refunds based on fictitious Social Security benefits and false claims for education credits, the Earned Income Tax Credit (EITC), or the American Opportunity Tax Credit, among others.
The IRS sometimes hears about scams from victims complaining about losing their federal benefits, such as Social Security benefits, certain veteran’s benefits or low-income housing benefits. The loss of benefits was the result of false claims being filed with the IRS that provided false income amounts.
While honest tax preparers provide their customers a copy of the tax return they’ve prepared, victims of scam frequently are not given a copy of what was filed. Victims also report that the fraudulent refund is deposited into the scammer’s bank account. The scammers deduct a large “fee” before cutting a check to the victim, a practice not used by legitimate tax preparers.
The IRS reminds all taxpayers that they are legally responsible for what’s on their returns even if it was prepared by someone else. Taxpayers who buy into such schemes can end up being penalized for filing false claims or receiving fraudulent refunds.
Taxpayers should take care when choosing an individual or firm to prepare their taxes. Honest return preparers generally: ask for proof of income and eligibility for credits and deductions; sign returns as the preparer; enter their IRS Preparer Tax Identification Number (PTIN); provide the taxpayer a copy of the return.
Beware: Intentional mistakes of this kind can result in a $5,000 penalty.
Return Preparer Fraud
About 60 percent of taxpayers will use tax professionals this year to prepare their tax returns. Most return preparers provide honest service to their clients. But, some unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.
It is important to choose carefully when hiring an individual or firm to prepare your return. This year, the IRS wants to remind all taxpayers that they should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs).
The IRS also has a web page to assist taxpayers. For tips about choosing a preparer, details on preparer qualifications and information on how and when to make a complaint, view IRS Fact Sheet 2014-5, IRS Offers Advice on How to Choose a Tax Preparer.
Remember: Taxpayers are legally responsible for what’s on their tax return even if it is prepared by someone else. Make sure the preparer you hire is up to the task.
IRS.gov has general information on reporting tax fraud. More specifically, you report abusive tax preparers to the IRS on Form 14157, Complaint: Tax Return Preparer. Download Form 14157 and fill it out or order by mail at 800-TAX FORM (800-829-3676). The form includes a return address.
Hiding Income Offshore
Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.
The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice (DOJ) to prosecute tax evasion cases.
While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.
Since 2009, tens of thousands of individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore is increasingly more difficult.
At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The IRS works on a wide range of international tax issues with DOJ to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.
The IRS has collected billions of dollars in back taxes, interest and penalties so far from people who participated in offshore voluntary disclosure programs since 2009. It is in the best long-term interest of taxpayers to come forward, catch up on their filing requirements and pay their fair share.
Impersonation of Charitable Organizations
Another long-standing type of abuse or fraud is scams that occur in the wake of significant natural disasters.
Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.
They may attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources. Bogus websites may solicit funds for disaster victims. The IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips:
- To help disaster victims, donate to recognized charities.
- Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible.
- Don’t give out personal financial information, such as Social Security numbers or credit card and bank account numbers and passwords, to anyone who solicits a contribution from you. Scam artists may use this information to steal your identity and money.
- Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.
Call the IRS toll-free disaster assistance telephone number (866-562-5227) if you are a disaster victim with specific questions about tax relief or disaster related tax issues.
False Income, Expenses or Exemptions
Another scam involves inflating or including income on a tax return that was never earned, either as wages or as self-employment income in order to maximize refundable credits. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions. This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.
Additionally, some taxpayers are filing excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. But other individuals have claimed the tax credit although they were not eligible. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.
Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are wrong and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or disregard their responsibility to pay taxes.
Those who promote or adopt frivolous positions risk a variety of penalties. For example, taxpayers could be responsible for an accuracy-related penalty, a civil fraud penalty, an erroneous refund claim penalty, or a failure to file penalty. The Tax Court may also impose a penalty against taxpayers who make frivolous arguments in court.
Taxpayers who rely on frivolous arguments and schemes may also face criminal prosecution for attempting to evade or defeat tax. Similarly, taxpayers may be convicted of a felony for willfully making and signing under penalties of perjury any return, statement, or other document that the person does not believe to be true and correct as to every material matter. Persons who promote frivolous arguments and those who assist taxpayers in claiming tax benefits based on frivolous arguments may be prosecuted for a criminal felony.
Falsely Claiming Zero Wages or Using False Form 1099
Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.
Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme. Filing this type of return may result in a $5,000 penalty.
Some people also attempt fraud using false Form 1099 refund claims. In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS. In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return.
Don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.
Abusive Tax Structures
Abusive tax schemes have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions.
IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax schemes. CI’s primary focus is on the identification and investigation of the tax scheme promoters as well as those who play a substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax scheme (e.g., accountants, lawyers). Secondarily, but equally important, is the investigation of investors who knowingly participate in abusive tax schemes.
What is an abusive scheme? The Abusive Tax Schemes program encompasses violations of the Internal Revenue Code (IRC) and related statutes where multiple flow-through entities are used as an integral part of the taxpayer’s scheme to evade taxes. These schemes are characterized by the use of Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and other similar instruments. The schemes are usually complex involving multi-layer transactions for the purpose of concealing the true nature and ownership of the taxable income and/or assets.
Form over substance are the most important words to remember before buying into any arrangements that promise to “eliminate” or “substantially reduce” your tax liability. The promoters of abusive tax schemes often employ financial instruments in their schemes. However, the instruments are used for improper purposes including the facilitation of tax evasion.
The IRS encourages taxpayers to report unlawful tax evasion. Where Do You Report Suspected Tax Fraud Activity?
Misuse of Trusts
Trusts also commonly show up in abusive tax structures. They are highlighted here because unscrupulous promoters continue to urge taxpayers to transfer large amounts of assets into trusts. These assets include not only cash and investments, but also successful on-going businesses. There are legitimate uses of trusts in tax and estate planning, but the IRS commonly sees highly questionable transactions. These transactions promise reduced taxable income, inflated deductions for personal expenses, the reduction or elimination of self-employment taxes and reduced estate or gift transfer taxes. These transactions commonly arise when taxpayers are transferring wealth from one generation to another. Questionable trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.
IRS personnel continue to see an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses, as well as to avoid estate transfer taxes. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.
The IRS reminds taxpayers that tax scams can take many forms beyond the “Dirty Dozen,” and people should be on the lookout for many other schemes. More information on tax scams is available at IRS.gov.
The IRS’s annual ‘Dirty Dozen’ list includes common tax scams that often peak during the tax filing season. The IRS recommends that taxpayers be aware so they can protect themselves against claims that sound too good to be true. Taxpayers who buy into illegal tax scams can end up facing significant penalties and interest and even criminal prosecution.
The tax scams that made the Dirty Dozen list this filing season are:
Identity Theft. Tax fraud through the use of identity theft tops this year’s Dirty Dozen list. Combating identity theft and refund fraud is a top priority for the IRS. The IRS’s ID theft strategy focuses on prevention, detection and victim assistance. During 2012, the IRS protected $20 billion of fraudulent refunds, including those related to identity theft. This compares to $14 billion in 2011. Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should immediately contact the IRS so the agency can take action to secure their tax account. If you have received a notice from the IRS, call the phone number on the notice. You may also call the IRS’s Identity Protection Specialized Unit at 800-908-4490. Find more information on the identity protection page on IRS.gov.
Phishing. Phishing typically involves an unsolicited email or a fake website that seems legitimate but lures victims into providing personal and financial information. Once scammers obtain that information, they can commit identity theft or financial theft. The IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. If you receive an unsolicited email that appears to be from the IRS, send it to firstname.lastname@example.org.
Return Preparer Fraud. Although most return preparers are reputable and provide good service, you should choose carefully when hiring someone to prepare your tax return. Only use a preparer who signs the return they prepare for you and enters their IRS Preparer Tax Identification Number (PTIN). For tips about choosing a preparer, visit www.irs.gov/chooseataxpro.
Hiding Income Offshore. One form of tax evasion is hiding income in offshore accounts. This includes using debit cards, credit cards or wire transfers to access those funds. While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements taxpayers need to fulfill. Failing to comply can lead to penalties or criminal prosecution. Visit IRS.gov for more information on the Voluntary Disclosure Program.
“Free Money” from the IRS & Tax Scams Involving Social Security. Beware of scammers who prey on people with low income, the elderly and church members around the country. Scammers use flyers and ads with bogus promises of refunds that don’t exist. The schemes target people who have little or no income and normally don’t have to file a tax return. In some cases, a victim may be due a legitimate tax credit or refund but scammers fraudulently inflate income or use other false information to file a return to obtain a larger refund. By the time people find out the IRS has rejected their claim, the promoters are long gone.
Impersonation of Charitable Organizations. Following major disasters, it’s common for scam artists to impersonate charities to get money or personal information from well-intentioned people. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds. Taxpayers need to be sure they donate to recognized charities.
False/Inflated Income and Expenses. Falsely claiming income you did not earn or expenses you did not pay in order to get larger refundable tax credits is tax fraud. This includes false claims for the Earned Income Tax Credit. In many cases the taxpayer ends up repaying the refund, including penalties and interest. In some cases the taxpayer faces criminal prosecution. In one particular scam, taxpayers file excessive claims for the fuel tax credit. Fraud involving the fuel tax credit is a frivolous claim and can result in a penalty of $5,000.
False Form 1099 Refund Claims. In this scam, the perpetrator files a fake information return, such as a Form 1099-OID, to justify a false refund claim.
Frivolous Arguments. Promoters of frivolous schemes advise taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. These are false arguments that the courts have consistently thrown out. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.
Falsely Claiming Zero Wages. Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, scammers use a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 to improperly reduce taxable income to zero. Filing this type of return can result in a $5,000 penalty.
Disguised Corporate Ownership. Scammers improperly use third parties form corporations that hide the true ownership of the business. They help dishonest individuals underreport income, claim fake deductions and avoid filing tax returns. They also facilitate money laundering and other financial crimes.
Misuse of Trusts. There are legitimate uses of trusts in tax and estate planning. But some questionable transactions promise to reduce the amount of income that is subject to tax, offer deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the promised tax benefits. They primarily help avoid taxes and hide assets from creditors, including the IRS.
For more on the Dirty Dozen, see IRS news release IR-2013-33.
Additional IRS Resources:
IRS YouTube Videos:
IR-2013-27: Enrolled Agent Disbarred for Steali ng a Client’s Tax Payments and Preparing Returns with False Deductions
WASHINGTON — The Internal Revenue Service today announced that its Office of Professional Responsibility (OPR) obtained the disbarment of enrolled agent Lorna M. Walker for stealing a client’s tax payments and for preparing tax returns with false deductions for multiple clients.
Walker’s enrolled agent status and her ability to prepare federal tax returns were revoked for at least five years. Walker practiced in the Seattle area.
“Practitioners who disregard their responsibilities to the tax system and their clients can expect to hear from OPR,” said Karen L. Hawkins, director of OPR. “Any tax professional who steals from a client or causes them undue tax problems is unfit to practice before this agency.”
In a Final Agency Decision, the Administrative Law Judge (ALJ) disbarred Walker for misappropriating client payments intended for the IRS in furtherance of an offer in compromise, and for preparing multiple returns containing Schedule C deductions for which she could not produce substantiation on audit.
Walker was engaged to represent a taxpayer in a collection matter. The client gave Walker two money orders totaling $1,500 to forward to the IRS along with an offer in compromise for delinquent taxes. It was found by the ALJ that Walker altered, endorsed and cashed the money orders for her own personal use, which are acts of willful incompetent and disreputable conduct under Circular 230.
The ALJ also found that Walker prepared Forms 1040 for seven clients claiming Schedule C deductions that were unsubstantiated and unsupportable. It was found that Walker failed to exercise due diligence in preparing the Schedule C’s thereby violating multiple due diligence provisions contained in Circular 230.
Walker also failed to respond to the administrative complaint and the motion for default judgment. The ALJ determined that because Walker failed to respond either to the complaint or to the motion for default judgment, she was deemed to admit all the allegations in the complaint, and to not oppose the default motion.
The text of the ALJ Decision can be found on IRS.gov.
The IRS receives thousands of reports every year from taxpayers who receive emails out-of-the-blue claiming to be from the IRS. Scammers use the IRS name or logo to make the message appear authentic so you will respond to it. In reality, it’s a scam known as “phishing,” attempting to trick you into revealing your personal and financial information. The criminals then use this information to commit identity theft or steal your money.
The IRS has this advice for anyone who receives an email claiming to be from the IRS or directing you to an IRS site:
- Do not reply to the message;
- Do not open any attachments. Attachments may contain malicious code that will infect your computer; and
- Do not click on any links in a suspicious email or phishing website and do not enter confidential information. Visit the IRS website and click on ‘Identity Theft’ at the bottom of the page for more information.
Here are five other key points the IRS wants you to know about phishing scams.
1. The IRS does not initiate contact with taxpayers by email or social media channels to request personal or financial information;
2. The IRS never asks for detailed personal and financial information like PIN numbers, passwords or similar secret access information for credit card, bank or other financial accounts;
3. The address of the official IRS website is www.irs.gov. Do not be misled by sites claiming to be the IRS but ending in .com, .net, .org or anything other than .gov. If you discover a website that claims to be the IRS but you suspect it is bogus, do not provide any personal information on their site and report it to the IRS;
4. If you receive a phone call, fax or letter in the mail from an individual claiming to be from the IRS but you suspect they are not an IRS employee, contact the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contact you. Report any bogus correspondence. Forward a suspicious email to email@example.com;
5. You can help the IRS and other law enforcement agencies shut down these schemes. Visit the IRS.gov website to get details on how to report scams and helpful resources if you are the victim of a scam. Click on “Reporting Phishing” at the bottom of the page.
Additional IRS Resources:
IR-2013-17: IRS Intensifies National Crackdown on Identity Theft; Part of Wider Effort to Protect Taxpayers, Prevent Refund Fraud
WASHINGTON – Continuing a year-long enforcement push against refund fraud and identity theft, the Internal Revenue Service today announced the results of a massive national sweep in recent weeks targeting identity theft suspects in 32 states and Puerto Rico, which involved 215 cities and surrounding areas.
The coast-to-coast effort against 389 identity theft suspects led to 734 enforcement actions in January, including indictments, informations, complaints and arrests. The effort comes on top of a growing identity theft effort that led to 2,400 other enforcement actions against identity thieves during fiscal year 2012.
The January crackdown, a joint effort with the Department of Justice and local U.S. Attorneys offices, unfolded as the IRS opened the 2013 tax season. IRS Criminal Investigation expanded its efforts during January, pushing the total number of identity theft investigations to more than 1,460 since the start of the federal 2012 fiscal year on Oct. 1, 2011.
“As tax season begins this year, we want to be clear that there is a heavy price to pay for perpetrators of refund fraud and identity theft,” said IRS Acting Commissioner Steven T. Miller. “We have aggressively stepped up our efforts to pursue and prevent refund fraud and identity theft, and we will continue to intensely focus on this area. This is part of a much wider effort underway for the 2013 tax season to stop fraud.”
The national effort with the Justice Department and other federal, state and local agencies is part of a larger, comprehensive identity theft strategy the IRS has embarked on that is focused on preventing, detecting and resolving identity theft cases as soon as possible.
The identity theft effort – which intensified in January as the 2013 filing season opened – involved 734 enforcement actions related to identity theft and refund fraud. The effort led to actions taking place throughout the country involving 389 individuals. The effort included 109 arrests, 189 indictments, informations and complaints, as well as 47 search warrants.
In addition to the criminal actions, IRS auditors and criminal investigators conducted a special compliance effort starting on Jan. 28 to visit 197 money service businesses to help make sure these businesses are not assisting identity theft or refund fraud when they cash checks. The compliance visits occurred in 17 high-risk places identified by the IRS covering areas in and surrounding New York, Philadelphia, Atlanta, Tampa, Miami, Chicago, Houston, Phoenix, Los Angeles, San Diego, El Paso, Tucson, Birmingham, Detroit, San Francisco, Oakland and San Jose.
A map of the locations and additional details on the January enforcement actions and compliance visits are available on IRS.gov. The latest updates on the identity theft enforcement efforts and individual cases are available on a special Identity Theft Schemes page on IRS.gov. More information on enforcement actions can be found on a DOJ Tax Division page.
The identity theft push over the last several weeks reflects a wider effort underway at the IRS. Among the highlights:
- The number of IRS criminal investigations into identity theft issues more than tripled in fiscal year 2012. The IRS started 276 investigations in fiscal year 2011, a number that jumped to 898 in fiscal year 2012. So far in fiscal year 2013, there have been more than 560 criminal identity theft investigations opened.
- Total enforcement actions continue to rapidly increase against identity thieves. This category covers actions ranging from indictments and arrests to search warrants. In fiscal year 2012, enforcement actions totaled 2,400 against 1,310 suspects. After just four months in fiscal 2013, enforcement actions totaled 1,703 against 907 suspects.
- Sentencings of convicted identity thieves continue to increase. There were 80 sentencings in fiscal year 2011, which increased to 223 in fiscal year 2012.
- Jail time is increasing for identity thieves. The average sentence in fiscal year 2012 was four years or 48 months – a four-month increase from the average in fiscal year 2011. So far this fiscal year, sentences have ranged from 4 to 300 months.
More information on IRS Criminal Investigation efforts is available on IRS fact sheet FS-2013-12.
In addition to the national “sweeps” effort announced today, IRS work on identity theft and refund fraud continues to grow. For the 2013 filing season, the IRS has expanded these efforts to better protect taxpayers and help victims.
To stop identity thieves up front, the IRS has made a significant increase for the 2013 tax season in the number and quality of identity theft screening filters that spot fraudulent tax returns before refunds are issued. The IRS has dozens of identity theft screens now in place to protect tax refunds.
These efforts helped the IRS in 2012 protect $20 billion of fraudulent refunds, including those related to identity theft, compared with $14 billion in 2011.
By late 2012, the IRS assigned more than 3,000 IRS employees — over double from 2011 — to work on identity theft-related issues. IRS employees are working to prevent refund fraud, investigate identity theft-related crimes and help taxpayers who have been victimized by identity thieves. In addition, the IRS has trained 35,000 employees who work with taxpayers to recognize identity theft indicators and help people victimized by identity theft.
“We are strengthening our processing systems to watch for identity theft and detect refund fraud before it occurs,” Miller said. “And we continue to put more resources on helping people who are victims of identity theft and resolve these complex cases as quickly as possible.”
Taxpayers can encounter identity theft involving their tax returns in several ways. One instance is where identity thieves try filing fraudulent refund claims using another person’s identifying information, which has been stolen. Innocent taxpayers are victimized because their refunds are delayed.
To help taxpayers, the IRS has a special section on IRS.gov dedicated to identity theft issues, including YouTube videos, tips for taxpayers and a special guide to assistance. For victims, the information includes how to contact the IRS Identity Protection Specialized Unit. For other taxpayers, there are tips on how taxpayers can protect themselves against identity theft.
If a taxpayer receives a notice from the IRS indicating identity theft, they should follow the instructions in that notice. A taxpayer who believes they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure their tax account. The taxpayer should contact the IRS Identity Protection Specialized Unit at 800-908-4490. The taxpayer will be asked to complete the IRS Identity Theft Affidavit, Form 14039, and follow the instructions on the back of the form based on their situation.
Taxpayers looking for additional information can consult the special identity protection page on IRS.gov.
Stacie Kitts, CPA
I hate you is harsh, but warranted.
I have no reservation is saying ” I hate you if you are a tax scammer con artist.” You give the tax preparer profession a bad name and I hate you. You put taxpayers in a precarious position and I hate you. You make my job harder and I hate you. You are a disgusting low life taking advantage of low income and elderly taxpayers and I really hate you!!!!
The IRS announced a new series of scams involving tax credits. The scammers promise the taxpayer a large refund and charges a huge amount of money to prepare the return.
After the IRS rejects the taxpayers claim, the taxpayer realizes they are out the preparation fee with no recourse because the tax preparer has disappeared.
WASHINGTON — The Internal Revenue Service encouraged taxpayers to guard against being misled by unscrupulous individuals trying to persuade them to file false claims for tax credits or rebates.
The IRS has noted an increase in tax-return-related scams, frequently involving unsuspecting taxpayers who normally do not have a filing requirement in the first place. These taxpayers are led to believe they should file a return with the IRS for tax credits, refunds or rebates for which they are not really entitled. Many of these recent scams have been targeted in the South and Midwest.
Most paid tax return preparers provide honest and professional service, but there are some who engage in fraud and other illegal activities. Unscrupulous promoters deceive people into paying for advice on how to file false claims. Some promoters may charge unreasonable amounts for preparing legitimate returns that could have been prepared for free by the IRS or IRS sponsored Volunteer Income Tax Assistance partners. In other situations, identity theft is involved.
Taxpayers should be wary of any of the following:
- Fictitious claims for refunds or rebates based on excess or withheld Social Security benefits.
- Claims that Treasury Form 1080 can be used to transfer funds from the Social Security Administration to the IRS enabling a payout from the IRS.
- Unfamiliar for-profit tax services teaming up with local churches.
- Home-made flyers and brochures implying credits or refunds are available without proof of eligibility.
- Offers of free money with no documentation required.
- Promises of refunds for “Low Income – No Documents Tax Returns.”
- Claims for the expired Economic Recovery Credit Program or Recovery Rebate Credit.
- Advice on claiming the Earned Income Tax Credit based on exaggerated reports of self-employment income.
In some cases non-existent Social Security refunds or rebates have been the bait used by the con artists. In other situations, taxpayers deserve the tax credits they are promised but the preparer uses fictitious or inflated information on the return which results in a fraudulent return.
Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file with little or no documentation, have been appearing in community churches around the country. Promoters are targeting church congregations, exploiting their good intentions and credibility. These schemes also often spread by word of mouth among unsuspecting and well-intentioned people telling their friends and relatives.
Promoters of these scams often prey upon low income individuals and the elderly.
They build false hopes and charge people good money for bad advice. In the end, the victims discover their claims are rejected or the refund barely exceeds what they paid the promoter. Meanwhile, their money and the promoters are long gone.
Unsuspecting individuals are most likely to get caught up in scams and the IRS is warning all taxpayers, and those that help others prepare returns, to remain vigilant. If it sounds too good to be true, it probably is.
Anyone with questions about a tax credit or program should visit www.IRS.gov, call the IRS toll-free number at 800-829-1040 or visit a local IRS Taxpayer Assistance Center.
For questions about rebates, credit and benefits from other federal agencies contact the relevant agency directly for accurate information
Even if you have been a bad taxpayer, California is willing to give you a break.
Voluntary Compliance Initiative 2 (VCI 2) is an opportunity for taxpayers who underreported their California income tax liabilities, through the use of abusive tax avoidance transactions (ATAT) or offshore financial arrangements (OFA), to amend their returns for 2010 and prior tax years and obtain a waiver of most penalties.
Filing period: August 1, 2011 to October 31, 2011
Applicable tax years: 2010 and prior
You are eligible to participate in VCI 2 if you (or one of your related entities):
- Filed a tax return that underreported your income or tax liability through the use of an ATAT or OFA.
You are eligible even if you:
- Are currently under FTB examination for an ATAT or OFA.
- Are currently under administrative protest or appeal for an ATAT or OFA.
- Participated in the IRS’s Offshore Voluntary Disclosure Initiative.
You must take the following steps to participate:
- File a completed Participation Agreement form with us between August 1, 2011 and October 31, 2011.
- Attach the form to your amended return to report all income from all sources, without regard to the ATAT and including all income from the OFA.
- Pay all tax and interest by October 31, 2011. See payment options for more information.
Participation in VCI 2 will allow you to avoid:
- The cost of litigation.
- Certain penalties and the associated interest.
- Criminal prosecution.
You can avoid the following penalties under VCI 2:
- Noneconomic Substance Transaction Understatement Penalty
- Accuracy Related Penalty
- Interest Based Penalty
- Fraud Penalty
If you are eligible but do not participate, you will be subject to the full range of penalties and interest, and may be subject to criminal prosecution.
The Large Corporate Understatement Penalty (LCUP) and the Amnesty Penalty cannot be waived under this initiative.
By Stacie Kitts, CPA
When I read a story about someone who appears to have been messing with the tax system for some thirty years, it makes me wonder…..who in the heck did their taxes, and why did it take so long to get busted.
The Orange County District Attorney is reporting that James and Dorothy Klinger, owners of Jamo’s Gardening and Modern Tree Services Inc. are charged with 28 counts of failing to file a return with intent to evade tax, 28 counts of willful failure to pay taxes, and some felony counts for lying about their business to a worker’s compensation insurance company.
These two are looking at spending the rest of their lives in prison if convicted.
They appear to have used an old school tax crook technique and kept two sets of books. You know, one that showed the “real” dollars and one that was a work of fiction.
Was it worth it? You decide….
They are accused of underreporting about $3.6 million in income and $3 million in wages. This translates to about 1.9 million that should have been paid over in taxes (give or take) that they got to keep – for a little while anyway.
I don’t know about you, but $2 million isn’t enough money to risk a 40 year prison sentence. Am I Right!?
- Anonymously ‘squeal’ on tax cheats (dontmesswithtaxes.typepad.com)
- Top 10 tax tips from CPAs, also known as Letterman’s annual spoofing of taxes (dontmesswithtaxes.typepad.com)
- IRS Reminds Taxpayers How To Provide Earthquake Relief For Japan (staciesmoretaxtips.wordpress.com)
- 2011 Depreciation Deduction Limitations – (and a classic video from The Cars) (staciesmoretaxtips.wordpress.com)
REG-134235-08 provides notice of public hearing on a notice of proposed rulemaking providing guidance to tax return preparers on furnishing an identifying number on tax returns and claims for refund of tax that they prepare.
Stacie says: “I don’t know about the suspsension period mentioned below. The IRS reports that attorney Michael McCall was suspended for 24 months from practice before the IRS for writing a bogus tax opinion. Frankly, if this guy wrote a bad opinion on purpose, I think it should be a permanent suspension. But that’s just me.”
WASHINGTON — The Internal Revenue Service has accepted an offer of consent to suspension from bond attorney Michael W. McCall. Under the terms of the settlement agreement, McCall will be suspended from practice before the IRS for at least 24 months for writing a false tax opinion. Thereafter, he may petition for reinstatement.
“Practitioners have a duty to their clients, the system, and the municipal finance bond community to ensure that the tax advice they are giving their clients complies with the law and is complete and accurate,” IRS Office of Professional Responsibility (OPR) Director Karen L. Hawkins said.
McCall was engaged by a state of Washington county municipal sewer district to act as co-bond counsel and special tax counsel to write an opinion as to the tax-exempt status of the district bonds issued in October 2000 and to perform due diligence with respect to certain transactional matters relating to the bond issuance. The district issued the bonds for its utility local improvement district for a proposed commercial development. The bonds were issued in violation of state law as the utility local improvement district was located outside of the sewer district boundaries. The bonds defaulted and have been determined to be invalid.
The OPR alleged that McCall’s opinion on the tax-exempt status of the district bonds was false under Circular 230, Section 10.51(j), and that McCall’s opinion on certain transactional matters was also false under Section 10.51(j). In addition, the OPR alleged that McCall failed to perform due diligence under Circular 230, section 10.22, with respect to transactional matters related to the bond issuance, including an undisclosed payment to him from bond proceeds received by the developer.
Following an OPR investigation, McCall admitted to violations of Circular 230 for giving false opinions, knowingly, recklessly, or through gross incompetence (Treasury Department Circular 230, Section 10.51(j) (2000)), and for failing to exercise due diligence (Treasury Department Circular 230, Section 10.22 (2000)).
The settlement agreement included a disclosure authorization that allowed the IRS to issue this release.
WASHINGTON — As the April 15 tax deadline approaches, the Internal Revenue Service today announced initial results from its stepped-up effort involving enforcement and education to combat unscrupulous tax return preparers and protect the nation’s taxpayers.
The IRS said it has conducted more than 5,000 field visits to tax return preparers this fiscal year. In addition, the IRS has worked with the Department of Justice to pursue questionable return preparers, an effort that has led to 56 indictments, 25 convictions and 21 civil injunctions since Jan. 1, 2010.
“We are working to help ensure taxpayers receive competent and ethical service from qualified tax professionals,” said IRS Commissioner Doug Shulman. “Our efforts this tax season are part of a longer-term effort to improve the oversight of this critical part of the tax system. The vast majority of tax return preparers provide solid service, but we need to do more to protect taxpayers.”
Shulman announced in January the results of a six-month study of the tax return preparer industry, which proposed new registration, testing and continuing education of tax return preparers. With more than 80 percent of American households using a tax preparer or tax software to help them prepare and file their taxes, higher standards for the tax return preparer community will significantly enhance protections and service for taxpayers, increase confidence in the tax system and result in greater compliance with tax laws over the long term. While this longer-term effort is underway, the IRS has taken several immediate steps this filing season to assist taxpayers.
The IRS has worked closely with the Justice Department this tax season to increase legal actions against unscrupulous tax return preparers, obtaining 21 civil injunctions, 56 indictments and 25 convictions of return preparers so far in 2010. More information is available at the IRS Civil and Criminal Actions page on irs.gov. and at the Department of Justice Tax Division page on DOJ.gov.
“The IRS appreciates the strong support of the Justice Department for its efforts to pursue and shut down bad actors in the tax return industry,” Shulman said. “This effort makes a real difference for the nation’s taxpayers and helps protect the many tax professionals who play by the rules.”
“While the majority of return preparers provide excellent service to their clients, a few unscrupulous tax preparers file false and fraudulent returns to defraud the government and the tax-paying public. Those actions are illegal, and can result in substantial civil penalties as well as criminal prosecution, for both the return preparers and their customers who knew or should have known better. Taxpayers should choose carefully when hiring a tax preparer,” said John A. DiCicco, Acting Assistant Attorney General of the Justice Department’s Tax Division.
Also during this filing season, the IRS used investigative tools on a broad basis, including agents posing as taxpayers, to seek out and stop unscrupulous preparers from filing inaccurate returns. To date, the IRS conducted 230 undercover visits to tax return preparers. In addition, dozens of search warrants have been completed.
The IRS will continue to work closely with the Department of Justice to pursue civil and criminal action as appropriate.
In January, the IRS sent more than 10,000 letters to tax return preparers. These letters reminded them of their obligation to prepare accurate returns for their clients, reviewed common errors, and outlined the consequences of filing incorrect returns. The letters went to preparers with large volumes of specific tax returns where the IRS typically sees frequent errors, although simply receiving a letter was not an indication the preparer had problems.
The IRS followed up with field visits to about 2,400 tax return preparers who received these letters to discuss many of the issues mentioned in the letter. Separately, the IRS conducted other compliance and educational visits with return preparers on a variety of other issues. All told, IRS representatives visited more than 5,000 paid preparers to encourage and help them avoid filing incorrect or fraudulent returns for their clients.
The IRS will be reviewing the results of these letters and visits to determine steps for future filing seasons.
The IRS has recently begun to implement a number of steps to increase oversight of federal tax return preparers. This includes proposed regulations that would require paid tax return preparers to obtain and use a preparer tax identification number (PTIN). Later this year, the IRS will propose additional regulations requiring competency tests and continuing professional education for paid tax return preparers who are not attorneys, certified public accountants and enrolled agents.
Setting higher standards for the tax preparer community will significantly enhance protections and services for taxpayers, increase confidence in the tax system and result in greater compliance with tax laws over the long term. Other measures the IRS anticipates taking are highlighted in Publication 4832, Return Preparer Review, issued earlier this year.
Help for Taxpayers before April 15
As the tax deadline approaches, the IRS reminds taxpayers that most tax return preparers are professional, honest and provide excellent service to their clients. But a few simple steps can help people choose a good tax return preparer and avoid fraud:
- Be wary of tax preparers who claim they can obtain larger refunds than others.
- Avoid tax preparers who base their fees on a percentage of the refund.
- Use a reputable tax professional who signs the tax return and provides a copy. Consider whether the individual or firm will be around months or years after the return has been filed to answer questions about the preparation of the tax return.
- Check the person’s credentials. Only attorneys, CPAs and enrolled agents can represent taxpayers before the IRS in all matters, including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared.
- Find out if the return preparer is affiliated with a professional organization that provides its members with continuing education and other resources and holds them to a code of ethics.
More information is available on IRS.gov, including IRS Fact Sheet 2010-03, How to Choose a Tax Preparer and Avoid Tax Fraud.
There are many e-mail scams circulating that fraudulently use the Internal Revenue Service name or logo as a lure. The goal of the scam – known as phishing – is to trick you into revealing personal and financial information. The scammers can then use your personal information – such as your Social Security number, bank account or credit card numbers – to commit identity theft and steal your money.
Here are five things the IRS wants you to know about phishing scams.
1. The IRS does not send unsolicited e-mails about a person’s tax account or ask for detailed personal and financial information via e-mail.
2. The IRS never asks taxpayers for their PIN numbers, passwords or similar secret access information for their credit card, bank or other financial accounts.
3. If you receive an e-mail from someone claiming to be the IRS or directing you to an IRS site,
- Do not reply to the message.
- Do not open any attachments. Attachments may contain malicious code that will infect your computer.
- Do not click on any links. If you clicked on links in a suspicious e-mail or phishing Web site and entered confidential information, visit IRS.gov and enter the search term ‘identity theft’ for more information and resources to help.
4. You can help shut down these schemes and prevent others from being victimized. If you receive a suspicious e-mail that claims to come from the IRS, you can forward that e-mail to a special IRS mailbox, firstname.lastname@example.org. You can forward the message as received or provide the Internet header of the e-mail. The Internet header has additional information to help us locate the sender.
5. Remember, the official IRS Web site is http://www.irs.gov/. Do not be confused or misled by sites claiming to be the IRS but end in .com, .net, .org or other designations instead of .gov.
Link: Suspicious e-Mails and Identity Theft
WASHINGTON — The Internal Revenue Service today issued its 2010 “dirty dozen” list of tax scams, including schemes involving return preparer fraud, hiding income offshore and phishing.
“Taxpayers should be wary of anyone peddling scams that seem too good to be true,” IRS Commissioner Doug Shulman said. “The IRS fights fraud by pursuing taxpayers who hide income abroad and by ensuring taxpayers get competent, ethical service from qualified professionals at home in the U.S.”
Tax schemes are illegal and can lead to imprisonment and fines for both scam artists and taxpayers. Taxpayers pulled into these schemes must repay unpaid taxes plus interest and penalties. The IRS pursues and shuts down promoters of these and numerous other scams.
The IRS urges taxpayers to avoid these common schemes:
Return Preparer Fraud
Dishonest return preparers can cause trouble for taxpayers who fall victim to their ploys. Such preparers derive financial gain by skimming a portion of their clients’ refunds, charging inflated fees for return preparation services and attracting new clients by promising refunds that are too good to be true. Taxpayers should choose carefully when hiring a tax preparer. Federal courts have issued injunctions ordering hundreds of individuals to cease preparing returns and promoting fraud, and the Department of Justice has filed complaints against dozens of others, which are pending in court.
To increase confidence in the tax system and improve compliance with the tax law, the IRS is implementing a number of steps for future filing seasons. These include a requirement that all paid tax return preparers register with the IRS and obtain a preparer tax identification number (PTIN), as well as both competency tests and ongoing continuing professional education for all paid tax return preparers except attorneys, certified public accountants (CPAs) and enrolled agents.
Setting higher standards for the tax preparer community will significantly enhance protections and services for taxpayers, increase confidence in the tax system and result in greater compliance with tax laws over the long term. Other measures the IRS anticipates taking are highlighted in the IRS Return Preparer Review issued in December 2009.
Hiding Income Offshore
The IRS aggressively pursues taxpayers involved in abusive offshore transactions as well as the promoters, professionals and others who facilitate or enable these schemes. Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks, brokerage accounts or through the use of nominee entities. Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or insurance plans.
IRS agents continue to develop their investigations of these offshore tax avoidance transactions using information gained from over 14,700 voluntary disclosures received last year. While special civil-penalty provisions for those with undisclosed offshore accounts expired in 2009, the IRS continues to urge taxpayers with offshore accounts or entities to voluntarily come forward and resolve their tax matters. By making a voluntary disclosure, taxpayers may mitigate their risk of criminal prosecution.
Phishing is a tactic used by scam artists to trick unsuspecting victims into revealing personal or financial information online. IRS impersonation schemes flourish during the filing season and can take the form of e-mails, tweets or phony Web sites. Scammers may also use phones and faxes to reach their victims.
Scam artists will try to mislead consumers by telling them they are entitled to a tax refund from the IRS and that they must reveal personal information to claim it. Criminals use the information they get to steal the victim’s identity, access bank accounts, run up credit card charges or apply for loans in the victim’s name.
Taxpayers who receive suspicious e-mails claiming to come from the IRS should not open any attachments or click on any of the links in the e-mail. Suspicious e-mails claiming to be from the IRS or Web addresses that do not begin with http://www.irs.gov should be forwarded to the IRS mailbox: email@example.com.
Filing False or Misleading Forms
The IRS is seeing various instances where scam artists file false or misleading returns to claim refunds that they are not entitled to. Under the scheme, taxpayers fabricate an information return and falsely claim the corresponding amount as withholding as a way to seek a tax refund. Phony information returns, such as a Form 1099-Original Issue Discount (OID), claiming false withholding credits usually are used to legitimize erroneous refund claims. One version of the scheme is based on a false theory that the federal government maintains secret accounts for its citizens, and that taxpayers can gain access to funds in those accounts by issuing 1099-OID forms to their creditors, including the IRS.
Nontaxable Social Security Benefits with Exaggerated Withholding Credit
The IRS has identified returns where taxpayers report nontaxable Social Security Benefits with excessive withholding. This tactic results in no income reported to the IRS on the tax return. Often both the withholding amount and the reported income are incorrect. Taxpayers should avoid making these mistakes. Filings of this type of return may result in a $5,000 penalty.
Abuse of Charitable Organizations and Deductions
The IRS continues to observe the misuse of tax-exempt organizations. Abuse includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property. The IRS also continues to investigate various schemes involving the donation of non-cash assets including situations where several organizations claim the full value for both the receipt and distribution of the same non-cash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions.
Promoters of frivolous schemes encourage people to make unreasonable and outlandish claims to avoid paying the taxes they owe. If a scheme seems too good to be true, it probably is. The IRS has a list of frivolous legal positions that taxpayers should avoid. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or IRS guidance.
Abusive Retirement Plans
The IRS continues to find abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers use to avoid the limits on contributions to IRAs, as well as transactions that are not properly reported as early distributions. Taxpayers should be wary of advisers who encourage them to shift appreciated assets at less than fair market value into IRAs or companies owned by their IRAs to circumvent annual contribution limits. Other variations have included the use of limited liability companies to engage in activity that is considered prohibited.
Disguised Corporate Ownership
Corporations and other entities are formed and operated in certain states for the purpose of disguising the ownership of the business or financial activity by means such as improperly using a third party to request an employer identification number.
Such entities can be used to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance with the law.
Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS.
Sometimes fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme. Filings of this type of return may result in a $5,000 penalty.
Misuse of Trusts
For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are many legitimate, valid uses of trusts in tax and estate planning, some promoted transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means to avoid income tax liability and to hide assets from creditors, including the IRS.
The IRS has recently seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust arrangement.
Fuel Tax Credit Scams
The IRS receives claims for the fuel tax credit that are excessive. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But other individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim and potentially subjects those who improperly claim the credit to a $5,000 penalty.
How to Report Suspected Tax Fraud Activity
Suspected tax fraud can be reported to the IRS using Form 3949-A, Information Referral. The completed form or a letter detailing the alleged fraudulent activity should be addressed to the Internal Revenue Service, Fresno, CA 93888. The mailing should include specific information about who is being reported, the activity being reported, how the activity became known, when the alleged violation took place, the amount of money involved and any other information that might be helpful in an investigation. The person filing the report is not required to self-identify, although it is helpful to do so. The identity of the person filing the report can be kept confidential.
Whistleblowers also may provide allegations of fraud to the IRS and may be eligible for a reward by filing Form 211, Application for Award for Original Information, and following the procedures outlined in Notice 2008-4, Claims Submitted to the IRS Whistleblower Office under Section 7623.
Monica Lawver over at The Tax CPA has some great commentary regarding this IRS release. You should check it out. She provides some interesting insight on regulating the profession in her post The Three Rules.
WASHINGTON — A Certified Public Accountant has been suspended for twelve months from practice before the Internal Revenue Service by the Office of Professional Responsibility for providing false or misleading information in connection with the preparation of his clients’ tax returns.
“Practitioners have a duty both to their clients and to the system to insure taxpayers are complying with tax laws and filing complete and accurate tax returns,” Karen L. Hawkins, Director of the Office of Professional Responsibility said.
Robert A. Loeser, a certified public accountant from Houston, Texas, assisted his clients to lower their tax bills by claiming false business expenses on tax returns he prepared.
For no legitimate business purpose, Loeser’s clients were advised to forward funds from their businesses to two corporations Loeser controlled. The corporations then rebated the funds to his clients. Loeser prepared the clients’ books and business tax returns expensing and deducting the entire amounts that were paid to the corporations.
The IRS alleged Loeser violated Circular 230 by giving false or misleading information to the Department of Treasury and the IRS.
The settlement agreement included a disclosure authorization that allowed the Office of Professional Responsibility to issue this release.
The Office of Professional Responsibility (OPR) establishes and enforces standards of competence, integrity and conduct for tax professionals — enrolled agents, attorneys, CPAs, and other individuals and groups covered by Treasury Circular 230.
WASHINGTON — The Internal Revenue Service released the 2010 version of its discussion and rebuttal of many of the more common frivolous arguments made by individuals and groups that oppose compliance with federal tax laws.
Anyone who contemplates arguing on legal grounds against paying their fair share of taxes should first read the 80-page document, The Truth about Frivolous Tax Arguments.
The document explains many of the common frivolous arguments made in recent years and it describes the legal responses that refute these claims. It will help taxpayers avoid wasting their time and money with frivolous arguments and incurring penalties.
Congress in 2006 increased the amount of the penalty for frivolous tax returns from $500 to $5,000. The increased penalty amount applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position the IRS identifies as frivolous.
IRS highlighted in the document about 40 new cases adjudicated in 2009. Highlights include cases involving injunctions against preparers and promoters of Form 1099-Original Issue Discount schemes and injunctions against preparers and promoters of false fuel tax credit schemes.