The Most Common Taxpayer Scams on the IRS’s Radar
Taxpayers encounter a lot of scams throughout the year. The number of scams is the highest right around tax season when millions of tax returns are getting prepared. Tax scams are very common. Every year, the IRS puts together a list called “The Dirty Dozen” which includes the more popular tax scams. Below are some of the more common scams that people have experienced, listed in random order.
Trying to Qualify For a Tax Credit by Falsifying Income
Who would think that someone would report income that he did not earn? You would think that this would increase his taxes. However, there are tax credits that can only be taken if a certain income level is reached.
So, some people try to report more income than they have earned in order to claim a tax credit. This is just as wrong as under-reporting income.
Criminals have been stealing Social Security numbers in order to file income tax returns to get a refund under a false identity. Some are successful in getting away with it, and it is a common scam year after year. Identity thefts are at an all-time high, and using it to scam the IRS is just one way that a false identity can be used by criminals.
Tax Arguments That Are Frivolous
Some people will try to convince you that you do not have to pay taxes because you do not work for the government. Some try to make you believe that the tax can be overridden by State commercial codes. Some will even try to claim that the income tax code is against the constitution. Do not fall for those types of arguments. You are required to pay income taxes.
Abusive Tax Shelters
Some scammers will try to convince you that you can legitimately invest in a financial instrument without it looking like the investment belongs to you. That can greatly reduce your tax liability, but it is not allowed. If the transaction requires you to fill out forms or take steps that would end up hiding what the investment is worth, that is an abusive transaction.
Transactions that are designed to hide your income are against IRS rules. There are no legitimate tax evasion schemes. Be very careful when you are drawn to a promise saying that you can significantly reduce your tax liability by taking part in one of these schemes. These kinds of arrangements are often too good to be true and can get you into trouble with the IRS if they discover them.
Dishonest Tax Preparers Who Claim They Can Get You a Big Refund
More than half of the taxpaying population uses a tax preparation service to file their tax returns. Most of these services are offered by experienced tax professionals who are honest and ethical. They provide valuable assistance to taxpayers who do not or cannot prepare their own returns. They do the U.S. tax system a great service by preparing these returns.
However, there are tax preparers who are not honest. There are those who will throw you a sales pitch claiming that they can get you a big refund. Beware of claims like that. Never sign a tax return form before it is completely filled out because chances are, the tax preparer has something dishonest up his sleeve.
Charities That Are Fake
Your charitable donations are legitimately tax deductible. However, you qualify for a deduction only if the charity is legitimate. The organization must have a Form 990 on file with the IRS. If it does not, then it probably is not a bona fide charity.
Giving your money to a fake charity will not reward you with any tax deductions. Not only that, but you will be filling the pockets of some unscrupulous individual. Therefore, do not just donate to any organization asking for a donation from you. Look up the group online to confirm that it has filed a Form 990 before you give.
Using Falsified Documents to Hide Income
Some people try to hide their taxable income by falsifying information on 1099s or other forms. If your tax preparer suggests to you that you can greatly reduce your tax liability or get a big refund by using fake information, you should take your business somewhere else. Regardless of who actually prepares the tax return, you are ultimately legally responsible for its content. You should always avoid scams like this because they are against the law.
Hiding Your Income or Investment in an Offshore Account
If you have an offshore account and you have not been reporting it, think again. These days, the IRS can get information on offshore bank accounts owned by U.S. taxpayers. You cannot hide your money offshore anymore. Consult with an experienced tax advisor to find out how to properly report your offshore holdings.
Hopefully, this post leaves you thinking about how to advise clients properly and build their trust. They are your best source of referrals, and you need to protect them from going elsewhere for a “better deal”. Also, if you’re not doing electronic tax filing on their behalf, you should. If you efile 1099 and other tax forms for them, your customers should receive their refunds faster. I would also suggest you stop mailing tax forms. I use eFile4Biz.com to file 1099 online. The time saved allows me to focus on clients. Their short video below explains it all.