On March 26, 2013, the Internal Revenue Service 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.
“This tax season, the IRS has stepped up its efforts to protect taxpayers from a wide range of schemes, including moving aggressively to combat identity theft and refund fraud,” said IRS Acting Commissioner Steven T. Miller.
We have highlighted the following five tax scams from this list of which you should be aware for 2013 and beyond. The full report can be found in the IRS Newswire, Issue Number IR-2013-33.
1. Identity Theft
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.
During 2012, the IRS prevented the issuance of $20 billion of fraudulent refunds, including those related to identity theft, compared with $14 billion in 2011. This January, the IRS also conducted a coordinated and highly successful identity theft enforcement sweep. The coast-to-coast effort against identity theft suspects led to 734 enforcement actions in January, including 298 indictments, 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 Criminal Investigation unit has devoted more than 500,000 staff-hours to fighting this issue.
The IRS has 3,000 people working on identity theft related cases – more than double the number in late 2011. And we have trained 35,000 employees who work with taxpayers to help with identity theft situations. 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.
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, report it by sending it to firstname.lastname@example.org. 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.
3. 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.
The IRS has created a new web page to assist taxpayers. For tips about choosing a preparer, red flags, details on preparer qualifications and information on how and when to make a complaint, visit www.irs.gov/chooseataxpro.
4. 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. As in the case of a recent disaster, Hurricane Sandy, the IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips:
Call the IRS toll-free disaster assistance telephone number if you are a disaster victim with specific questions about tax relief or disaster related tax issues.
5. Misuse of Trusts
For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are legitimate uses of trusts in tax and estate planning, some highly questionable 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 of avoiding income tax liability and hiding assets from creditors, including the IRS.
IRS personnel have 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.