The Top 12 Tax Scams in 2014

Tax Documents on the Table, representing tax inversions

The IRS just released its annual list of the Dirty Dozen tax scams to watch out for this year.  The list identifies fraud the IRS sees against both the government and taxpayers.

Here is the list:

1. Identity Theft

Identity theft topped the list of tax schemes again in 2014. It made its first appearance on the list in 2011 and has been number one since 2012. The IRS has warned taxpayers heavily about the growing problem this tax season.

Tax identity theft occurs when an individual uses your personal information to file a return on your behalf without your authorization. If the IRS doesn’t recognize the return as fraudulent, they may end up paying out a refund to the individual committing fraud rather than you. When you later file your return, the IRS will deny it as a duplicate return. It may take months for the IRS to sort out the problem and issue the tax return to the correct individual.

The IRS denies millions of suspicious returns every year, but a significant amount still slip through. An audit by the Treasury Inspector General for Tax Administration found 1.1 million potentially fraudulent returns processed in 2011 for a suspected loss of $3.6 billion.

2. Pervasive Telephone Scams

This fraud is new to the list in 2014. Scam artists are making fake phone calls on behalf of the IRS in order to steal identities and financial information. They may replicate the IRS number on your caller ID or give out a fake badge number to identify themselves. You may also receive a follow up email. The IRS advises you to call the IRS number to pay tax obligations and report the call if it is suspicious.

3. Phishing

Individuals are still sending fake emails and advertising fake websites in order to learn key financial information about you, such as your social security number or credit card information. If you fall for the scam, they use it to commit identity theft or financial theft. Phishing was the top problem on the Dirty Dozen list in 2009.

4. False Promises of “Free Money” from Inflated Returns

Scammers are soliciting tax return business with the promise of hefty tax refunds. Taxpayers then pay them for bad advice as the scammers often file false claims for rebates or tax credits.

5. Return Preparer Fraud

Although most tax professionals are honest individuals, some aren’t. The National Consumer Law Center says there are “more regulatory requirements for hairdressers than tax preparers” in 46 states. Unscrupulous return preparers will commit refund fraud, submitting fake returns to the IRS or pocketing the refund of clients. This led the 2010 list of tax fraud.

6. Hiding Income Offshore

Offshore tax evasion continues despite high profile prosecutions and the IRS Offshore Voluntary Disclosure Program. U.S. citizens must pay U.S. taxes on income earned overseas. Taxpayers who have financial accounts overseas are also subject to reporting and disclosure requirements. Nevertheless, individuals continue to use offshore accounts and foreign trusts to avoid their tax obligations. Unreported overseas income was the top fraud on the list in 2011.

7. Impersonation of Charitable Organizations

Scam artists impersonate charities to collect money or financial information from unsuspecting taxpayers.

8. False Income, Expenses or Exemptions

Taxpayers are still filing excessive claims for the fuel tax credit and claiming extra income to maximize the Earned Income Tax Credit.

9. Frivolous Arguments

The IRS has a list of frivolous positions which taxpayers have erroneously claimed in order to avoid tax obligations. These arguments have been reject by courts and their use by taxpayers is subject to additional penalties.

10. Falsely Claiming Zero Wages or Using False Form 1099

Taxpayers are fraudulently filing a corrected Form 1099 or Form 4852 (Substitute Form W-2) in order to reduce their taxable income.

11. Abusive Tax Structures

Tax scheme promoters often hype the creation of multiple entities in order to obscure income and ownership of assets and avoid tax obligations through multi-layer transactions.

12. Misuse of Trusts

Although trusts are often used legitimately for tax and estate planning, the IRS also sees improper trusts used to illegitimately avoid tax obligations. Private annuity trusts and foreign trusts are identified by the IRS as two examples increasingly used incorrectly.

Young Law Group represents individuals reporting tax fraud to the IRS whistleblower program. If you would like a free, confidential legal consultation about becoming a tax whistleblower, please call 1-800-590-4116 or fill out the contact form to speak to Eric L. Young or another attorney at Young Law Group.