Written by: Thomas M. Geier, CPA, CFP®, PFS
Each year, the Internal Revenue Service (IRS) issues a list of the “Dirty Dozen” tax scams to raise the awareness of the taxpaying public, and hopefully, help them avoid falling prey to any such scam. These scams occur throughout the year, but are most intense during the spring tax filing season. Most of these unscrupulous scammers find their easiest prey to be people who are very trusting, unaware of the danger, confused by complicated tax matters, or are tempted by the desire to avoid paying taxes altogether.
We have compiled a brief summary of this year’s list and made some recommendations. The complete list and more details are available at the IRS website here »
Dirty Dozen Tax Scams
- Phone Scams: If you receive a phone call from someone who says they are from the IRS who threatens you with police arrest, deportation, license revocation or other things, hang up. Contact a trusted friend or advisor and explain the call and they will help you determine if there is any real merit in it. The IRS will not call you out of the blue. Most likely, the caller was a scammer.
- Phishing: In the same manner, the IRS will not send you an email about a bill or refund by surprise. Don’t click any unexpected email claiming to be from the IRS that you are wary of. These fake emails may be scams to steal your personal information.
- Identity Theft: There are criminals out there who file fraudulent returns using someone else’s Social Security number. Keep all tax related information and any other important information regarding your identity secure.
- Return Preparer Fraud: The IRS says that about 60 percent of people pay someone else to prepare their tax return. Most of these preparers are honest and trustworthy. However, there are some dishonest preparers who set up shop each filing season to perpetrate refund fraud, identity theft, and other scams on this list. Make sure you check out the qualifications of your tax preparer. For example, at GAM, all of our preparers are licensed as Certified Public Accountants. You do not necessarily need a CPA to do a simple tax return, but your preparer should be enrolled with the IRS to prepare returns, and possess the necessary training and experience to be competent.
- Offshore Tax Avoidance: It’s a bad idea to hide money and income offshore. The IRS has been very successful with enforcement actions against offshore tax cheats and the financial organizations that help them. The IRS offers the Offshore Voluntary Disclosure Program (OVDP) to help people get their taxes in order.
- Inflated Refund Claims: Taxpayers need to be wary of anyone promising inflated or surprising tax refunds. Never sign a blank return. Do not use a preparer who promises you a big refund before even looking at your records or charges fees based on a percentage of the refund. The IRS says that scam artists use flyers, advertisements, phony store fronts and word of mouth via community groups and churches in seeking victims.
- Fake Charities: Be on guard against any groups masquerading as charitable organizations to attract donations from unsuspecting contributors. Make sure your contributions go to legitimate and currently eligible charities. The IRS.gov website has the tools taxpayers need to check out the status of charitable organizations.
- Hiding Income with Fake Documents: Filing false Form 1099’s or other fake documents is a scam that taxpayers should always be on the lookout for and definitely avoid. If a preparer suggests falsifying documents to reduce tax bills or inflate tax refunds, run away. You are legally responsible for what is on your returns regardless of who prepares the returns and what they instructed you to do.
- Abusive Tax Shelters: Taxpayers should avoid using complicated tax structures with the aim to avoid paying taxes. Watch out for people peddling tax shelters that sound too good to be true. Always get another opinion from a trustworthy tax professional.
- Falsifying Income to Claim Credits: Taxpayers should never make up income in order to erroneously claim tax credits as some scam artists try to suggest. Taxpayers are best served by filing completely accurate returns, as they are legally responsible for what is on their return.
- Excessive Claims for Fuel Tax Credits: This is not as well known, but taxpayers need to avoid improper claims for fuel tax credits. Obtaining a fuel tax credit is generally limited to off-highway business use, such as use in farming. Consequently, the credit is not available for most taxpayers.
- Frivolous Tax Arguments: Promoters of frivolous schemes that encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe are on the rise. Taxpayers have the right to contest their tax liabilities in court, but no one has the right to disobey the law or disregard their responsibility to pay taxes. The current penalty for filing a frivolous tax return is $5,000.
Taxes are not a popular topic for most people. But having a basic understanding and some knowledge of tax issues is important. Filing an accurate, timely tax return is vital to making sure you paid only the correct tax that is due. It is to your benefit to know all of the legal and proper deductions and credits that you are entitled to.
Be aware of the way criminals may try to do harm to you through scams that try to take advantage of your good nature. If you have any doubts about a tax related situation, please contact a knowledgeable and trusted friend or advisor.
Geier offers tax services, including:
© Geier Asset Management, Inc. January 2015. Thomas M. Geier is a Vice President of Geier Asset Management, Inc., a Registered Investment Advisor. The above blog reflects the opinions of Mr. Geier and not necessarily the firm. Any advice given is general in nature and investors must consider their own individual circumstances. Past performance is no indicator of future performance.