Don’t Fall Victim to these Tax Scams! Part 2

Your Guide to State, Local, Federal, Estate + International Taxation

Each year, the IRS updates their “Dirty Dozen” list of tax scams to watch out for during the filing season. We listed the first six scams here. Here are six more scams that taxpayers dealt with during the previous year.

#7 – Fake Charities

Scam artists masquerade as charitable organizations to attract donations from unsuspecting contributors every day. Be wary of charities with names that sound similar to familiar or nationally known organizations. They may even set up websites that look like those of legitimate charitable organizations.

When in doubt, use the Exempt Organizations Select Check feature on the IRS website to see if the organization is legitimate.

Legitimate charities will provide an Employer Identification Number (EIN) if requested, which can be used to locate the organization on Select Check. Don’t rely on the organization providing an EIN as proof of its legitimacy, though. Many fake charities print bogus EINs on their materials to look more convincing.

#8 – Falsely Padding Deductions

While the majority of taxpayers file complete and accurate returns each year, some fudge their information in order to under pay what they owe or receive larger refunds.

Overstating charitable deductions, padding business expenses, or claiming credits you are not entitled to receive can result in significant civil penalties or even criminal prosecution.

#9 – Excessive Claims for Business Credits

Two tax credits available to businesses seem to be particularly prone to abuse.

The federal government taxes gasoline, diesel, and other types of fuel. Certain businesses, primarily those involved in off-highway business use or farming, are entitled to a refund of those taxes through the fuel tax credit. Although the credit is not available to most taxpayers, the IRS routinely sees unscrupulous preparers convince taxpayers to erroneously claim the credit. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.

The research credit is designed to foster research and experimentation in the private sector. The IRS sees a number of fraudulent claims for the research credit each year. Those claims may take the form of claiming the credit on activities that do not qualify or including improper expenses in the calculation of the credit.

#10 – Falsifying Income to Claim Tax Credits

You might wonder why anyone would overstate the income they report to the IRS, but fraudsters do just that every year in attempts to claim credits that are based on the taxpayer having earned income, such as that from wages or self-employment.

Falsifying income in order to claim large refundable credits such as the Earned Income Tax Credit can result in serious repercussions, including being required to repay the credit plus interest and penalties or even criminal prosecution.

#11 – Abusive Tax Shelters

Abusive tax shelters may include anything from structuring foreign trust arrangements to taking advantage of the financial secrecy laws of some foreign countries. IRS Criminal Investigation has developed a nationally coordinated program to combat abusive tax shelters.

IRS Commissioner John Koskinen cautions taxpayers to “steer clear of unscrupulous promoters who sell phony tax shelters with no real purpose other than to avoid paying what is owed. These schemes can end up costing taxpayers more in back taxes, penalties, and interest than they saved in the first place.” A good rule of thumb: if it sounds too good to be true, it probably is.

#12 – Frivolous Tax Arguments

Those who oppose compliance with federal tax laws argue that taxpayers can refuse to pay taxes on religious or moral grounds, that the only “employees” subject to federal income tax are employees of the federal government, or that only foreign-source income is taxable.

In reality, 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 penalties and felony criminal prosecution.

By Janet Berry-Johnson, CPA