Every year, the Internal Revenue Service (IRS) publishes a list of the most common tax fraud schemes, known as the “Dirty Dozen.” (For example, last March our tax lawyers wrote about the IRS Dirty Dozen for 2018.) The list is a warning – not only for taxpayers who might be deceived by unethical tax preparers, but for anyone whose goal is to dodge the law and avoid paying his or her fair share of federal taxes. In this article, our IRS tax attorneys take a closer look at one of this year’s Dirty Dozen: “schemes involving falsifying income, including the creation of bogus Forms 1099.” As the IRS warns, reporting false income can lead to serious tax fraud penalties – or worse, criminal tax prosecution and possible loss of licensure if a licensed professional.
On March 11, with the deadline to file taxes for 2018 just a month away, the IRS issued a timely press release cautioning against “schemes involving falsifying income, including the creation of bogus Forms 1099,” such as fake Forms 1099-MISC (Miscellaneous Income). As the press release went on to explain, the incidence of tax fraud tends to spike annually during tax season, for the obvious reason that there are simply more individuals in the process of filing tax returns (or hiring CPAs and tax attorneys to do so on their behalf). Anticipating this pattern, IRS criminal investigation agents are likewise on high alert during tax filing season, translating to more tax audits – and with them, greater danger of investigation and prosecution for anyone who attempts to purposely evade income, FICA, payroll, or other taxes.
With auditing (and the imposition of severe penalties) likely, taxpayers must resist the temptation to “make up income or create forms,” which violates the Internal Revenue Code. While taxpayers sometimes conceal income to avoid paying taxes on it – a practice that, needless to say, constitutes fraud – other taxpayers take the opposite approach and fabricate income, “either as wages or self-employment income, usually to maximize refundable tax credits,” as the press release explains. The IRS cites the Earned Income Tax Credit (EITC) as a common example (with one recent instance documented here). Like hiding income, inventing income is also fraud – merely from another angle.
Our office has also noted a recent three-fold increase in preparer investigations related to the EITC and prepares being accused of merely not meeting their due diligence requirements as to the EITC, to being accused of outright fraud for creating false income to support bogus EITC claims.
The press release calls special attention to Forms 1099, a series of federal information returns used to report certain payments and transactions to the IRS, such as Form 1099-MISC, which is used by people or businesses that pay independent contractors to perform freelance work above certain financial thresholds – generally $600, which applies to payments for “rent,” “prizes and awards,” and various “services performed by someone who is not your employee,” among other types of payments. (Note that some reporting thresholds, such as the threshold for royalties, may be substantially lower or higher than $600, as explained in the 2019 Instructions for Form 1099-MISC.)
As the IRS warns, scams involving fake Forms 1099 are typically “disguised as a debt payment option for credit cards or mortgage debt,” which means they target victims who are already struggling financially. If you’re searching for debt repayment plans, avoid being lured into Form 1099 scams by sticking to well-known, reputable businesses and services.
Ultimately, the IRS cautions, “taxpayers are… responsible for the accuracy of their tax return even if they pay someone else to prepare it.” Translation? Use common sense and always exercise caution when placing your financial health into another person’s hands.
With the filing deadline creeping up quickly, get confidence and peace of mind by choosing a tax preparation service supported by an award-winning team of tax compliance attorneys, CPAs, and EAs with decades of accounting, auditing, and legal experience. At the Tax Law Office of David W. Klasing, we are attorneys, accountants, and former auditors recognized throughout the country for our distinctive record of excellent service.
Let’s talk about how we can make it easier to do your taxes this year – or correct tax mistakes from the past. To schedule a reduced-rate consultation, contact the Tax Law Office of David W. Klasing online, or call us today at (800) 681-1295.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland and Sacramento.
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