Avoid These "Dirty Dozen" Tax Scams in 2017

The annual “Dirty Dozen” list of common tax schemes and scams from the IRS includes scams that may be perpetrated against you as a taxpayer as well as schemes that taxpayers try to get past Uncle Sam. Our advice: don’t get caught up in either. Read on to learn how you can avoid tax scams of any kind.

1. Phishing

Using email or a fake website, criminals can steal your financial information through a method called phishing. If a strange email pops up in your inbox asking for personal information or suggesting that you click on a link to install spyware or other malware, report it to the IRS by forwarding it to phishing@irs.gov. Whatever you do, do not click on or respond to these types of emails!

2. Phone Scams

Criminals posing as IRS agents may call you requesting to collect tax debts. This was the most reported type of phone scam last year, and the trend is expected to continue in 2017. Usually, these criminals will insist that money needs to be paid to the IRS immediately or legal action will ensue. Be aware, though, that the IRS will never call to demand immediate payment over the phone, nor will they call about taxes owed without first mailing you a bill. If you receive such a phone call and are not sure if it is legitimate, call the IRS directly at 800-829-1040. If you receive such a call and are positive you do not owe taxes, report the call to the Treasury Inspector General for Tax Administration at 800-366-4484.

3. Identity Theft

By using personal information such as your name, address, and Social Security number, criminals can potentially steal your identity. Often this scam is perpetrated to file a fraudulent tax return and claim a refund. If you believe you have been a victim of this type of identity theft, contact the IRS Identity Protection Specialized Unit at 800-908-4490.

4. Return Preparer Fraud

Some tax preparers may attempt to encourage taxpayers to claim improper credits, deductions, or exemptions. This gives the tax preparer an unfair boost in refunds. You should only use tax preparers who sign returns and enter their IRS Preparer Tax Identification Number (PTIN). Check to see if your tax preparer has a PTIN, click here.

5. Fake Charities

One of the most immoral tax scams is when groups pretend to be charities when they are actually stealing donations for personal gain. If you donate, these organizations can steal your money and even your identity. To avoid this scam, donate only to recognized charities (Charity Navigator and similar organizations can help), and make your donation using either a check or a credit card if possible. Avoid giving any charity your personal information.

6. Inflated Refund Claims

There are many types of inflated refund claims, but the majority are based on refundable tax credits such as the Earned Income Tax Credit and the Additional Child Tax Credit. Providing false income amounts or false refund claim amounts can cause you to lose federal benefits, pay penalties, and potentially receive jail time.

7. Excessive Claims for Business Credits

There are two areas the IRS observes when it comes to excessive claims: the fuel tax credit and the research credit. If you claim excessive business credits to reduce your taxes, you may be subject to penalties and interest.

8. Falsely Padding Deductions on Returns

You may be tempted to claim just a little bit more of a deduction on your tax return, but overstating deductions even slightly can lead to major penalties and potentially criminal prosecution.

9. Falsifying Income to Claim Credits

Hiding your income is one thing, but if you misrepresent your income in any way, you may have to pay back the false refunds you get, including interest, as well as penalties, and you may be subject to criminal prosecution. To maximize their refundable credits, criminals can either inflate or include income on a tax return that was never earned as wages or self-employment income.

10. Abusive Tax Shelters

These schemes hide the ownership of your taxable income and/or assets to claim credits that you did not earn. Tax shelters can come in the form of trust arrangements, offshore tax schemes, and multiple pass-through companies, such as LLCs.

11. Frivolous Tax Arguments

Examples of frivolous tax arguments are contentions such as (1) taxpayers can refuse to pay taxes on religious grounds, (2) the only employees subject to federal income tax are employees of the federal government, and (3) only foreign-source income is taxable. Deciding to partake in one of these arguments will cost you a $5000 penalty, possibly more, and potentially criminal prosecution.

12. Offshore Tax Avoidance

It is illegal to use cash, brokerage accounts, or other foreign investments to evade taxes in the United States. By hiding your income in offshore accounts, you will eventually suffer extremely heavy fines as well as criminal prosecution.