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Educate now to combat these common tax scams.

Every year, the IRS releases a list of what it calls the worst tax scams of the year. These "dirty dozen" scams peak during tax season but can be encountered at any time of year. Now is a good time to familiarize your firm and your clients with these risks.

1. IDENTITY THEFT

In tax-related identity theft, someone uses a taxpayer's stolen Social Security number to file a tax return claiming a fraudulent refund. Although the IRS has introduced more effective screening and detection systems to detect identity theft before it issues a refund, the Service admitted that it is still a major problem.

2. PHONE SCAMS

In this scam, criminals call, impersonating the IRS, and may threaten arrest, deportation, or license revocation. The IRS said it will never call to demand immediate payment, call about taxes owed without first having mailed a bill, call to demand payment without the opportunity to question or appeal, require use of a specific payment method, ask for credit or debit card numbers over the phone, or threaten to bring in law enforcement to arrest a taxpayer for not paying.

3. PHISHING

"Phishing" scams send taxpayers unsolicited emails seeking financial or personal information. A taxpayer who receives a suspicious email should send it to phishing@irs.gov.

4. RETURN PREPARER FRAUD

Return preparer fraud involves "dishonest preparers who set up shop each filing season to perpetrate refund fraud, identity theft, and other scams that hurt taxpayers." The IRS warned taxpayers to be wary of "unscrupulous preparers who prey on unsuspecting taxpayers with outlandish promises of overly large refunds."

5. HIDING MONEY OR INCOME OFFSHORE

Hiding money or income offshore is a major focus of IRS enforcement efforts. There are legitimate reasons that taxpayers have foreign accounts, but these accounts trigger reporting requirements. The IRS offers a number of programs, including the Offshore Voluntary Disclosure Program, for taxpayers to come into compliance with these requirements.

6. INFLATED REFUND CLAIMS

Another scam that is closely related to return preparer fraud is inflated refund claims, in which unscrupulous preparers set up shop to lure unsuspecting taxpayers.

7. FAKE CHARITIES

Taxpayers are cautioned to check the Exempt Organizations Select Check on the IRS's website to determine whether a charity is bona fide and qualifies for deductible contributions. Fake charities often use names similar to well-known organizations and may set up fake websites.

8. FALSELY PADDING DEDUCTIONS

The IRS warned taxpayers that they should "think twice" before overstating their charitable contribution expenses or padding their business expenses, and avoid claiming credits they are not entitled to, such as the earned income tax credit (EITC) and the child tax credit.

9. EXCESSIVE CLAIMS FOR BUSINESS CREDITS

This scam involves two specific false claims for credits: refunds of fuel excise tax and the research tax credit.

10. FALSIFYING INCOME TO CLAIM TAX CREDITS

This usually involves falsely claiming higher earned income to qualify for the EITC, which is a refundable credit. Unscrupulous preparers often do this to get taxpayers larger refunds than they are entitled to.

11. ABUSIVE TAX SHELTERS

Abusive tax shelters are defined as schemes using multiple flowthrough entities to evade taxes. They often use limited liability companies and partnerships, foreign companies, and multilayer transactions to conceal who owns the income or assets.

12. FRIVOLOUS TAX ARGUMENTS

Announcing the release of the 2016 version of its webpage, "The Truth About Frivolous Tax Arguments," the IRS explained how the courts and the IRS have treated these arguments, which involve claims such as that the only employees subject to income tax are employees of the federal government or that only foreign income is taxable.
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Publication:Journal of Accountancy
Date:May 1, 2016
Words:603
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