Counting Down the 12 Dirtiest Tax Scams & Schemes from the IRS
Happy Tax Day!
While the date may be different than the traditional April 15 this year, it’s always a good idea to be on the lookout for fraudulent tax schemes to avoid. From having your money — or more — stolen via phishing, phone scams, or identity theft to falsifying the information you or your tax preparer provide to the Internal Revenue Service (IRS), these schemes could leave you in hot water. In fact, they could lead to a higher chance of being audited — or even fines and criminal charges.
The IRS releases its “Dirty Dozen” list each year to highlight the worst of these tax scams. Let’s count down some of the tax schemes you should be aware of year-round.
These ruses might have been near the bottom of the IRS’s list in the last few years, but that’s no reason to disregard them.
12. Abusive Tax Shelters
Including “syndicated conservation easements,” tax shelters that abuse the IRS code unlawfully protect individuals from paying taxes. It’s important to note that not all tax shelters are abusive. If you plan to employ a tax shelter, be sure it’s legal — and doesn’t sound too good to be true.
11. Frivolous Tax Arguments
Carrying a penalty of $5,000, a frivolous tax argument refers to arguments in court that lack serious purpose. They include “unreasonable and outlandish claims about the legality of paying taxes” that are thrown out in court and designed to waste time and resources.
10. Offshore Tax Avoidance
Offshore tax avoiders stash their money in accounts held outside of the U.S. to hide it. The IRS has been cracking down on offshore tax avoidance in recent years, leading to billions of dollars in fines.
9. Excessive Claims for Business Credits
This refers to improperly claiming business tax credits — like the Research Credit and Fuel Tax Credit — for which most taxpayers aren’t eligible. However, those who are eligible wouldn’t want to miss out on these valuable credits, so it’s important to understand how to properly claim them.
These have landed near the middle of the list in the past few years, with some fluctuation.
8. Fake Charities
Considering donating to a charity … but it’s one you haven’t heard of before? Beware of solicitors from fake charities — even those with names that sound reputable. Scammers often use names similar to actual charities for their fakery.
▶︎ Before you make your donation, you can check in on legitimate charities using the IRS’s Tax-Exempt Organization Search.
7. Falsely Padding Deductions on Returns
For some, it can be tempting to overstate deductions or incorrectly claim a credit to reduce a tax liability or increase a refund. From padding the amount donated to charities or spent on medical expenses or for business purposes to claiming undue credits like the Earned Income Tax Credit and Childcare Tax Credit, these falsities could lead to steep IRS penalties.
6. Falsifying Income to Claim Credits
This refers to making up income to make the most of credits in amounts taxpayers otherwise wouldn’t be due. Don’t forget that it’s your job as a taxpayer to tell the truth — and you must be able to substantiate the information on your tax return.
5. Inflated Refund Claims
A tax preparer who promises big returns — even without looking at your tax documents — is a clear warning sign of this scam. Unscrupulous tax preparers tend to use this tactic to prey on vulnerable taxpayers, providing false income information to boost refunds. One easy way to avoid an inflated refund claim — and the potential for a $5,000 penalty for filing such a claim — is to choose your tax preparer wisely.
These have consistently topped the IRS’s “Dirty Dozen” list in the past three consecutive years, making them the dirtiest of the dirty.
4. Return Preparer Fraud
Similar to number five on this list, some fraudsters make themselves out to be upstanding tax preparers — but are actually out to scam their clients. They’ll dishonestly lead their clients to take credits and deductions that they’re not entitled to so they can increase the fees they charge. It goes to show that a little due diligence can go a long way when choosing your tax preparer.
3. Identity Theft
Just like it sounds, some tax preparers will steal personal information from their clients, whether it’s Social Security numbers or Individual Taxpayer Identification Numbers (ITIN). They then use this stolen information to file fake tax returns. While identity theft related to tax preparation has been less of a threat in recent years, it’s always a good idea to protect your personal information.
2. Phone Scams
Tax Preparation Available!
Tax Preparation Available!
▶︎ Don’t forget that the IRS will never ask for payment via wire transfer, debit card, or gift cards — and they’ll never threaten taxpayers with immediate arrest.
Similar to phone scams, phishing involves tricksters sending links to fake websites via email. These attacks have also broadened to include fraudulent text messages, calendar appointments, and social media posts. If you smell something fishy — like the promise of a big refund or someone claiming to be an IRS officer requesting banking information — avoid clicking links or opening attachments, and report the fraud to the IRS.
It’s important to remember that taxpayers pay amounts due to the “United States Treasury” — and nowhere else. And the IRS’s main method of contacting taxpayers is through the United States Postal Service. If an IRS official does come knocking, they’ll show you two forms of ID to prove their identity so you know they’re not a scammer.
And remember that, according to the IRS, “Taxpayers should remember that they are legally responsible for what is on their tax return even if it is prepared by someone else.” So if you don’t want to go it alone, be sure to look for a reputable tax preparer, like an Enrolled Agent, CPA, or attorney.
Additional resources used in writing this article include: