Tax scammers continue to work. Again this year, the IRS highlights the twelve top scams in its “Dirty Dozen” list. These scams are often aggressive and happen throughout the year.
The schemes run the gamut from simple refund inflation scams to complex tax shelter deals. A common theme throughout all: scams put taxpayers at risk.
Previously, we listed the first six of the scams in the IRS “Dirty Dozen” list (see link below). Here are the last six.
- Falsely Padding Deductions on Returns. Taxpayers are entitled to claim legitimate deductions on their tax returns. However, taxpayers may be asked to claim “just a little bit more” to get a bigger refund. Overstating deductions—even just a little —is improper and can lead to significant civil penalties and criminal prosecution. The IRS warns that you should think twice before overstating deductions, such as charitable contributions and business expenses.
- Fake Charities. Fake charities take advantage of your good nature to steal your money and, potentially, your identity. To avoid being taken advantage of, donate to recognized charities and be wary of charities with names that are similar to familiar or nationally known organizations. Remember that you don’t need to give out personal information, like your Social Security number or passwords, to get a receipt for your donation. For tips on making your charitable donation count, click here.
- Excessive Claims for Business Credits. Claiming excessive or bogus business credits to reduce your taxes is improper. Two schemes, in particular, involving the fuel tax credit (usually limited to off-highway business use, including use in farming) and the research credit, have attracted the attention of the IRS. Unsupported claims for tax credits may subject taxpayers to penalties and interest.
- Offshore Tax Avoidance. It is not illegal to have cash, brokerage accounts or other investments in foreign countries. It is, however, illegal to use foreign accounts to evade U.S. taxes. There are significant reporting requirements for offshore assets, including FBAR (Report of Foreign Bank and Financial Accounts) filings and other forms relating to gifts, trusts and foreign inheritances. Taxpayers who do not properly report and disclose those accounts are breaking the law and could face civil and criminal penalties and fines. If you need to make a disclosure because you failed to report in the past, the Offshore Voluntary Disclosure Program (OVDP) has ended, but there are still procedures that allow you to come clean (ask your tax pro for details).
- Frivolous Tax Arguments. Frivolous tax arguments may be used to avoid paying tax. Examples of frivolous tax arguments include refusal to pay taxes on religious or moral grounds by invoking the First Amendment, claiming that only federal employees are subject to federal income tax, or declaring that only foreign-source income is taxable. Those are all bogus. The penalty for taking one of these positions on a tax return is $5,000; additional penalties may also apply, including criminal prosecution.
- Abusive Tax Shelters. Abusive tax shelters don’t have to be multimillion dollar tax schemes. Sometimes, they can involve trust arrangements or the use of multiple pass-through companies like Limited Liability Companies (LLCs) to hide ownership of assets. You can’t legally avoid taxation by creating multiple layers of companies or trusts or by manipulating the ownership of assets. Legitimate tax planning is not the same as tax evasion. Don’t get sucked into schemes promoted by advisors who promise you that you can permanently avoid taxation by buying their shelters and products. If it sounds too good to be true, be wary.
– Peggy Beasterfeld, Owner, Peggy’s Tax and Accounting Service, Topeka, KS