Each year, the IRS comes out with a list of the top twelve tax scams. Although taxpayers can be taken advantage of by tax scams throughout the year, the IRS warns that the scammers are in full gear during tax season.
This is the time of year when tax payers are most aware of how much they pay in taxes and are looking to reduce their tax burden or trying to maximize a refund. Don't take the scammers bait and get yourself trapped.
Taxpayers should be wary of promises of free money, lost or unclaimed refunds that are available to be claimed by anybody or programs that promise to eliminate your tax burden. If it sounds too good, seek a second opinion and do additional research. Often times these scammers will try and apply pressure for you to act immediately, i.e. you have to act now, otherwise you will miss out on the opportunity, tax credit, etc.
Here are the top twelve tax scams that the IRS has highlighted his year.
1. Identity Theft
Tax scammers may steal your identity for the purpose of filing a false tax return, so that a refund will be sent to them. Recently the IRS has stepped up its efforts to crack down on refund fraud and identity theft. Contact the IRS at www.IRS.gov/identitytheft if you believe your identity was stolen and used for tax purposes.
The IRS does not communicate via email, text or social media. If you receive an email, text or phone call requesting personal information that appears to be from the IRS, you may report it by sending an email to email@example.com.
3. Return Preparer Fraud
As with any profession, there are always a small percentage of preparers that are looking to prey on individuals. The tax preparation profession is no different. Some preparers try and take advantage, by promising a larger than normal refund, demanding a percentage of the refund for the preparation fee, encouraging falsification of information for the purpose of obtaining a larger refund and using or promoting other unethical behavior. Do your homework and check out the reputation of the tax preparer you intend to use.
4. Hiding Income Offshore
It has been common knowledge that a number of individuals have hidden income offshore in an effort to evade paying taxes on income. In recent years the IRS has gone after individuals with offshore accounts. They implemented the Offshore voluntary Disclosure Program, allowing individuals to disclose their offshore accounts and come into compliance with US tax laws. Since they rolled out the program, 30,000 individuals have come forward. The IRS has let it be known, that those who do not come forward will be subject to severe penalties and possibly criminal prosecution. With the new reporting requirements for foreign accounts it will become increasingly difficult to continue to hide money in offshore accounts.
5. Free Money from the IRS & Tax Scams Involving Social Security
Beware of promises in fliers and advertisements of getting "free money" from the IRS or refunds or rebates from Social Security.
6. False/Inflated Income and Expenses
The IRS has found tax returns with over inflated income or expenses for the sole purposes of getting large refundable credits. Any taxpayer found over inflating their income or expenses, for this purpose, will not only be liable for paying the money back with interest and penalties but may also be subject to prosecution.
7. False Form 1099 Refund Claims
Individuals that file a false informational tax return, such as a 1099, for the purpose of filing a refund claim on a corresponding tax return may be subject to financial and criminal penalties.
8. Frivolous Arguments
Not the ones you have with your teenage children. These are unreasonable and outlandish arguments one makes to justify not paying taxes.
9. Falsely Claiming Zero Wages
Taxpayers may try and submit form 4852 (a substitute W2) or a "corrected" 1099 showing no wages. A $5,000 penalty can be assessed if it is found that a taxpayer filed one of these incorrect forms.
10. Abuse of Charitable Organizations and Deductions
IRS examiners are watching closely how donations to 501(c)(3) organizations, manage the donations, making sure that donors are not maintaining control over donated assets or the organization is not improperly shielding assets or income from taxation to benefit the donor.
11. Disguised Corporate Ownership
Third parties that are used to try and mask the true owners of a corporation. Often times disguised Corporations are used for underreporting income, claiming fictitious deductions, facilitating money laundering and committing financial crimes.
12. Misuse of Trust
There has been an increase in the abuse of trusts for the purpose of avoiding income tax liability and hiding assets from creditors. Taxpayers should always work with reputable professionals to understand the purpose of setting up the trust and how it will fit into their estate and tax planning.
The IRS issues a list of the top twelve tax scams each year. Here are five tax scams they highlight this summer.
- Phishing Phishing is a tactic used by scam artists to trick unsuspecting victims into revealing personal or financial information in an electronic communication. Scams can take the forms of e-mails, tweets, or phony websites and they try to mislead consumers by telling them they are entitled to a tax refund from the IRS and they must reveal personal information to claim it. Regardless of how official this e-mail may look and sound , the IRS never initiates unsolicited e-mail contact with taxpayers about their tax issues. Phishers use the personal information obtained to steal the victim's identity, access bank accounts, run up credit card charges or apply for loans in the victim's name. If you receive an e-mail that you suspect is a phishing attempt or directs you to an imitation IRS website, please forward it to the IRS at firstname.lastname@example.org. You can also visit IRS.gov an enter the keyword phishing for additional information.
- Frivolous Arguments 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 on IRS.gov. These arguments are false and have been thrown out of court.
- Return Preparer Fraud Dishonest tax return preparers can cause trouble for taxpayers who fall victim to their ploys. Such preparers are skimming a portion of their clients' refunds, charging inflated fees for tax preparation or are attracting new clients by promising refunds that are too good to be true. To increase confidence in the tax system, the IRS is requiring all paid return preparers to register with the IRS, pass competency tests and attend continuing education.
- Hiding Income Offshore Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks and brokerage accounts. IRS agents continue to develop their investigations of these offshore tax avoidance transactions using information gained from more than 14,700 voluntary disclosures received last year. Taxpayers also evade taxes, by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans.
- Abuse of Charitable Organizations and Deductions The IRS continues to observe the misuse of tax-exempt organizations. This includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets. The IRS also continues to investigate various schemes where donations are highly overvalued or the organization receiving the donation promises that the donor can purchase the items back at a later date at a price the donor sets.
In Jennifer Liberto's article, Wall Street reform: What's in the Bill, that was posted today on CNNMoney.com, she outlines some of the just negotiated, key provisions, between the Senate's Bill and the House's Bill.
The Financial reform bill covers issues, ranging form creating a new consumer agency, access to credit scores for consumers, debit card swipe fees, banning "lair" loans and mortgage help for unemployed. The bill, also gives expanded power to Federal Regulators, this includes: the creation of a new 10-member oversight council with expanded powers for the Treasury Secretary, gives the FDIC new powers for dealing with large financial firms and the ability to break-up those companies, gives the Government Accountability Office (GAO) the power to review the Fed activities, including auditing the Fed. In addition, banks and financial firms will be subject to additional taxes to cover the cost of implementing the Financial reform Bill. Check out her articles for additional details of what is currently on the table and will soon to be voted - possibly as early as next week.
Earlier this year, PA launched an aggressive amnesty campaign to collect back taxes owed to the PA Department of Revenue. Apparently, PA's amnesty campaign was extremely effective. According to Governor Rendell, the PA amnesty program brought in $261 million in previously uncollected revenue. The goal of the program was $190 million.
Because of the program's success, the state revenue agency and Governor Rendell plan on implementing new measures to go after additional back taxes owed. The Governor will be requesting additional money to fund the budget to hire additional revenue agents.
It should come as no surprise to anyone, that as the budget shortfall in the majority of states continues to be a problem each state will evaluate ways to collect moneys owed in back taxes. This may include implementing amnesty programs, hiring additional revenue agents and taking a much more aggressive stance in regards to collecting back taxes owed.
Now is not the time to try and evade or avoid paying taxes owed as it can lead to hefty fines, penalties and possible criminal charges for tax evasion.
$994 billion!!! No, it is not the cost of a new stimulus plan, more TARP, another government health care plan. It is the estimated amount that U.S. organizations lost to occupational fraud in 2008.
The Association of Certified Fraud Examiners recently issued its report - Report to the Nation on Occupational Fraud and Abuse. The report was conducted by compiling data from 959 cases of occupational fraud between January, 2006 and February, 2008. It was Certified Fraud Examiners who provided data for the study. As you will see from the highlights below, fraud is a costly matter for all businesses regardless of size. Small businesses are as susceptible to it as large organizations and the private sector as susceptible as the public sector.
Because fraud is so costly, it's important to implement controls, processes and procedures for detecting fraud or potential fraud before it occurs. One of the best models you can follow is the IRS model - compliance through fear. Most taxpayers are not enthused about paying taxes and filing their returns each year, but they do so because it's the law! Most tax payers are fearful of the IRS and the consequences of not complying with the tax laws. If someone knows that their work will be reviewed, and there are procedures in place to detect fraud, it is much more likely that an individual will not attempt fraud.
Some common tips for preventing fraud are surprise audits, having a second person review work, having a follow behind to double check the bookkeeping and preparing financial statements calling vendors to check on orders and verify they are real orders, and reconciling invoices to payments.
Here are some quick highlights of the Report To the Nation on Occupational Fraud and Abuse:
- Median loss by fraud - $175,000
- 25% of the frauds committed cost organizations more than $1 million
- Typical time frame for a fraud is 2 years
- Often times, the fraudster is a first time offender
- Most frequent way to catch frauds was through tips - 46% of cases were uncovered based on tips from employees, customers and vendors
- Anti-fraud controls did help reduce or catch fraudulent schemes. Organizations that conducted surprise audits had a median loss of $70,000 compared to $207,000 for those that did not have a plan in place.
- Most common industries victimized by fraud: banking and financial services - 15% of cases; government - 12% of cases; health care - 8% of cases
- Small businesses are not immune to fraud: Median loss for businesses with fewer than 100 employees - $200,000.
- inadequate internal controls are most common reasons that permitted fraud to occur.
- most organizations closed the barn door after the horses escaped. Anti-fraud controls were implemented by 78% of the organizations after they discovered the fraud.
- Most frequent perpetrators of fraud were upper management and accounting departments. Median loss for fraud committed by upper management was $853,000.