Filer Beware: The Top 12 Scams Leading Into the 2019 Tax Season
Beware of criminals who continue to use devious tactics to steal money and personal information from unsuspecting victims. As we enter the 2019 tax filing season, this is a time when many of the common tax scams that taxpayers encounter increase as individuals prepare to file their returns by April.
Several years ago, the IRS began annually compiling a list of common tax scams known as the “Dirty Dozen” list. Each of the scams that makes the list is highlighted by the IRS with an announcement over 12 consecutive days in order to raise awareness. We thought it might be useful to review the list that was released in March 2018 again, in light of being in the midst of tax filing season.
The scams on the 2018 list were the same as those identified on the 2017 list. However, we have highlighted updates regarding each particular scam. Here is a recap of the scams that made the list for 2018.1 Be sure to keep an eye out on the IRS website (www.irs.gov) for their updated list:
The Dirty Dozen
1. Phishing: Fake emails or websites looking to steal personal information. The IRS will never initiate contact with taxpayers via email about a bill or tax refund. Don’t click on one claiming to be from the IRS. The recent twist in phishing scams involves a scheme using the taxpayer’s own bank account to direct deposit a refund with a subsequent attempt by the perpetrator to reclaim the refund from the taxpayer. (IR-2018-39)
2. Phone Scams: Phone calls from criminals impersonating IRS agents remain an ongoing threat to taxpayers. The IRS has seen a surge of these phone scams in recent years as con artists threaten taxpayers with police arrest, deportation and license revocation, among other things. The IRS will never call you to demand specific payments. (IR-2018-40)
The Treasury Inspector General for Tax Administration (TIGTA) reports they have become aware of over 12,716 victims who have collectively paid over $63 million as a result of phone scams since October 2013.2
3. Identity Theft: Tax-related identity theft occurs when someone uses a stolen Social Security number or Individual Taxpayer Identification Number (ITIN) to file a fraudulent tax return claiming a refund. The IRS, the states and the tax industry, working together as the Security Summit, have enacted a series of safeguards that are making inroads against identity theft. (IR-2018-42)
The number of tax returns with confirmed identity theft declined to 597,000 in 2017, compared to 883,000 in 2016 – a 32 percent decline. The amount of refunds protected from those fraudulent returns was $6 billion in 2017, compared to $6.4 billion in 2016. In 2015, there were 1.4 million confirmed identity theft returns totaling $8.7 billion in refunds protected. Overall during the 2015-2017 period, the number of confirmed identity theft tax returns fell by 57 percent with more than $20 billion in taxpayer refunds being protected.3
4. Return Preparer Fraud: Unscrupulous return preparers who prey on unsuspecting taxpayers with promises of overly large refunds or other scams. (IR-2018-45)
5. Fake Charities: Groups masquerading as charitable organizations solicit donations from unsuspecting contributors. (IR-2018-47) In the wake of natural disasters, it is common for scam artists to impersonate charities established to help disaster victims.
6. Inflated Refund Claims: Unscrupulous return preparers promising inflated tax refunds before looking at taxpayer records or charge fees based on a percentage of the refund. To find victims, fraudsters may use flyers, phony storefronts or word of mouth via community groups where trust is high. (IR-2018-48)
7. Excessive Claims for Business Credits: Fraudulent or improper claiming of tax credits for businesses. Two common credits targeted for abuse by shady return preparers include the research credit and the fuel tax credit. The IRS continues to see significant misuse of the research credit with improper claims involving the failure to participate in or substantiate qualified research activities. The IRS has taken several steps to prevent a significant number of questionable fuel tax credit scams from being processed. New identity theft screening filters have improved the IRS’s ability to identify questionable fuel tax credit claims during return processing. (IR-2018-49)
8. Falsely Padding Deductions on Returns: Falsely inflating deductions or expenses on tax returns in hopes of paying less than what they owe or potentially receiving larger refunds. Common areas involve overstating charitable contributions and business expenses, or improperly claiming credits, such as the Earned Income Tax Credit or Child Tax Credit. (IR-2018-54)
9. Falsifying Income to Claim Credits: Inventing income to erroneously qualify for tax credits, such as the Earned Income Tax Credit. Some of these schemes involve bogus Forms 1099. (IR-2018-55)
10. Frivolous Tax Arguments: Frivolous tax arguments may be used to avoid paying tax. Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims about the legality of paying taxes despite being repeatedly thrown out in court. Examples include: The First Amendment allows taxpayers to refuse to pay taxes on religious or moral grounds or the only “employees” subject to federal income taxes are those who work for the federal government. (IR-2018-58)
11. Abusive Tax Shelters: Abusive tax structures are sometimes used to avoid paying taxes. In recent years, through audits, litigation, published guidance and legislation, the IRS continues to address those using abusive micro-captive insurance tax shelters In Notice 2016-66 (Nov. 1, 2016) the IRS advised that micro-captive insurance transactions have the potential for tax avoidance or evasion. The notice established reporting requirements for those entering into such transactions on or after November 2, 2006 and created disclosure and list maintenance obligations for material advisors. Separately, Congress has also acted to curb micro-captive abuses. The Protecting Americans from Tax Hikes (PATH) Act, effective January 1, 2017, established strict diversification and reporting requirements for new and existing captives. (IR-2018-62)
12. Offshore Tax Avoidance: Avoiding taxes by hiding money or assets in unreported offshore accounts. The IRS has intensified efforts on offshore issues in recent years. As a result, many taxpayers have voluntarily disclosed their participation in these schemes. The IRS has conducted thousands of offshore-related civil audits that resulted in the payment of tens of millions of dollars of unpaid taxes. The IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions. (IR-2018-64)
There have been more than 56,400 disclosures and the IRS has collected more than $11.1 billion from the Offshore Voluntary Disclosure Program (OVDP) since it opened in 2009. In addition, another 65,000 taxpayers have made use of separate streamlined procedures to correct prior non-willful omissions and meet their federal tax obligations.4
We urge taxpayers to watch out for these tricky and dangerous schemes. Phishing and other scams on the ‘Dirty Dozen’ list can trap unsuspecting taxpayers. Being cautious and taking basic security steps can help protect people and their sensitive tax and financial data.
Protect Yourself - Security Reminders for Taxpayers:
Do what you can to protect yourself. Here are some basic security steps to protect yourself and your sensitive tax and personal information:
- Use Security Software. Always use security software with firewall and anti-virus protections. Make sure the security software is always turned on and can automatically update. Encrypt sensitive files such as tax records stored on the computer. Use strong passwords.
- Watch out for Scams. Learn to recognize and avoid phishing emails, threatening phone calls and texts from thieves posing as legitimate organizations such as banks, credit card companies and government organizations, including the IRS. Do not click on links or download attachments from unknown or suspicious emails.
- Protect personal data. Don’t routinely carry a Social Security card, and make sure tax records are secure. Treat personal information like cash; don’t leave it lying around.
- Work with financial institutions that have implemented processes to protect your private, banking and financial information (such as multi-factor authentication, or call back verification for certain transactions, and e-mail encryption programs to secure sensitive personal information).
- Choose Return Preparers Carefully. Avoid fly-by night preparers. Ask if the preparer has an IRS Preparer Tax Identification Number (PTIN). Inquire whether the tax return preparer has a professional credential (enrolled agent, certified public accountant or attorney).
- Check preparer’s qualifications. Use the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualification available on the IRS website to search for a tax preparer listed with the IRS.
- Be wary of charities with names similar to familiar or nationally-known organizations. IRS.gov has a search feature, Exempt Organizations Select Check, that allows people to find legitimate, qualified charities to which donations may be tax-deductible.
- Don’t give out personal financial information, such as Social Security numbers or passwords, to anyone who solicits a charitable contribution.
Many of our clients choose to work with a tax preparer. The majority of tax professionals provide honest, high-quality service. But there are some dishonest preparers. Be vigilant in choosing a return preparer carefully. And always remember that even if you pay someone else to prepare your tax returns, taxpayers are legally responsible for what’s on their tax returns.