The Internal Revenue Service (IRS) publishes an annual list of the “Dirty Dozen,” which highlights 12 of the year’s most pervasive and destructive tax schemes. With Tax Day 2018 less than a month away, our criminal tax defense attorneys have compiled this year’s Dirty Dozen as a warning to our readers. If any of the tax scenarios featured on this list sound familiar, be on high alert: not only might you have been defrauded, you could also be at risk for incurring penalties, being audited, or even being prosecuted for tax crimes. Knowledge is the best defense, so before Tax Day arrives, take a few minutes to familiarize yourself with the IRS’ top 12 tax schemes to watch out for in 2018 – and if you think you recognize your current situation anywhere on this list, contact a tax lawyer immediately for assistance.
IRS Announces Top 12 Tax Fraud Schemes of 2018
It’s that time of year for taxpayers again. With March winding down, Tax Day is swiftly approaching – and for taxpayers, that can be dangerous. Not only are taxes almost due, notwithstanding cases where taxpayers have obtained extensions by filing Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return) – it’s also the time of year when fraudsters and con artists are out in full swing. As the IRS explains, Dirty Dozen tax scams “peak during filing season as people prepare their returns or hire someone to help with their taxes.”
With so many filers looking to tax preparers for assistance – about 56% of all taxpayers, according to the IRS – unscrupulous tax professionals have no shortage of opportunities to cheat and deceive the unwary. However, it will be easier to protect yourself if you know what to watch out for. With that in mind, our Orange County tax evasion lawyers have summarized the IRS’ Dirty Dozen of 2018. So what made the list this year?
- Abusive Tax Shelters – An abusive tax shelter can be broadly defined as any scheme designed to lower tax liabilities without actually changing the taxpayer’s assets or income. Though abusive tax shelters can take varied forms, the IRS is particularly concerned with micro-captive insurance shelters.
- Excessive Claims for Business Credits – Qualified business owners can claim various business tax credits, such as the fuel tax credit, claimed on Form 4136 (Credit for Federal Tax Paid on Fuels), or research credit, claimed on Form 6765 (Credit for Increasing Research Activities). However, many of the taxpayers who claim these credits are not qualified, and may be penalized accordingly. For example, there is a penalty of up to $5,000 for fraudulently claiming the fuel tax credit.
- Fake Charities – Taxpayers can claim charitable deductions on their income tax returns. Some scam artists exploit this fact by creating fake charities, not only duping taxpayers out of deductions, but their donations in the process.
- Falsely Padding Deductions on Returns – Standard or itemized tax deductions, such as the mortgage interest deduction, can be used to lower a taxpayer’s taxable income, thus reducing overall tax liability. Unfortunately, some taxpayers exaggerate their deductions or expenses in hopes of receiving a larger tax refund.
- Falsifying Income to Claim Credits – Some tax credits are income-based, such as the Earned Income Tax Credit (EITC). Taxpayers who report income inaccurately in order to claim tax credits can be heavily fined, with interest. Depending on the situation, the taxpayer could even be referred to the Department of Justice (DOJ) for prosecution.
- Frivolous Tax Arguments – Every year there are taxpayers who waste valuable time and resources by making (disproven) arguments about the constitutionality of taxation. The IRS tries to discourage such arguments by imposing fines of up to $5,000 for filing frivolous tax returns.
- Identity Theft – Identity theft can occur year-round, but the risk is heightened during tax season, when millions of taxpayers are sharing sensitive personal information. In 2017, approximately 242,000 people reported becoming victims of identity fraud to the IRS.
- Inflated Refund Claims – Everyone enjoys receiving a tax refund – but some phony “tax preparers” take this too far by advertising major refunds before even consulting the taxpayer, generally for a hefty percentage of the proceeds. As the IRS cautions, “Scam artists pose as tax preparers during tax time… us[ing] flyers, advertisements, phony storefronts or word of mouth to attract victims.” These scam artists typically operate by “making claims for fictitious rebates, benefits or tax credits,” though in some cases, they “may also file a false return in their client’s name, and the client never knows that a refund was paid.”
- Offshore Tax Avoidance – Offshore tax avoidance, which is the practice of illegally concealing foreign assets like bank accounts, is a topic our international tax attorneys frequently write about, because it has long been one of the IRS’ greatest priorities in terms of aggressive enforcement. Taxpayers still have a chance to mitigate penalties for offshore tax avoidance by participating in the Offshore Voluntary Disclosure Program (OVDP), but time is running out, with the program scheduled for termination later this year. *SEE NOTE AT BOTTOM OF DOC
- Phishing – “Phishing” refers to the practice of sending out apparently legitimate business emails for the purpose of duping recipients into responding with sensitive information. Scammers frequently imitate the IRS in phishing schemes. If you receive an email from the IRS concerning a tax refund or tax bill, do not reply. The IRS does not send email messages concerning these matters, meaning an email “from the IRS” is guaranteed to have a malicious source.
- Phone Scams – Phone scams verbally accomplish the same purpose as phishing. If you receive a suspicious phone call from an “IRS agent,” do not give out your information. End the call immediately, and report the incident to the Federal Trade Commission (FTC) and/or Treasury Inspector General for Tax Administration (TIGTA). The IRS will never demand payments or threaten to contact law enforcement over the phone.
- Tax Return Preparer Fraud – Our IRS tax attorneys have written about this subject repeatedly in our tax law blog, most recently here and here. A tax preparer who uses his or her tax knowledge to break the law faces professional sanctions, imprisonment, fines, and restitution – and a taxpayer who hires an unlawful tax preparer can face a similar fate. To quote the IRS, “Selecting the right tax professional is critically important because taxpayers are ultimately responsible for what they submit on their tax return.” Our tax preparer fraud attorneys can help if you have found yourself in this position, whether as a taxpayer or tax professional.
Interestingly, this list is virtually identical to the Dirty Dozen of 2017 and 2016, with one noticeable difference in 2015, when “hiding income with fake documents” made the ranks, only to drop off in the following years. You can see a yearly breakdown of the Dirty Dozen, dating back to 2014, by following this link to the IRS newsroom.
Get Trusted Tax Help from an Experienced Attorney-CPA or EA
Whether you’re worried that your tax preparer submitted false information on your tax return, need an aggressive defense attorney to represent you during an IRS criminal investigation, want to participate in the 2014 OVDP before it’s too late, or simply have questions about the tax benefits of donating to charity, turn to the knowledgeable and experienced tax lawyers, CPAs, and EAs at the Tax Law Office of David W. Klasing this tax season. From defending taxpayers charged with federal felonies to helping small business owners with strategic tax planning, our versatile and award-winning team is prepared to assist with any tax matter. Contact our law offices online, or call today at (800) 691-1295 for a reduced-rate consultation.
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