ID Theft Tops the List in 2016 ‘Dirty Dozen’ Tax Scams

It’s the most vulnerable time of the year for taxpayers: filing season. Around this time, many fall victim to tax schemes while preparing their returns or hiring someone to help with their taxes.

In an effort to protect taxpayers, the Internal Revenue Service (IRS) compiles a list each year of the “dirty dozen” tax scams, the most prevalent illegal schemes that taxpayers should be aware of. This year, identity theft has returned as the top problem.

The following are the 12 most common illegal tax scams of 2016:

1. Identity theft – One of the most common forms of tax fraud, identity theft takes place when a scammer steals identifying information to file a tax return and claim a refund. While the IRS continues to pursue individuals who file fraudulent tax returns using others’ Social Security numbers, taxpayers need to be very careful when providing personal information. The IRS has made it a top priority to help prevent identity theft by creating more secure systems and establishing new awareness campaigns.

2. Phone scams – An ongoing threat, this scam involves calls from criminals who impersonate IRS agents and attempt to steal taxpayer money. Recently, scam artists have taken it to a new extreme, threatening taxpayers with police arrest, deportation, and license revocation if they fail to make a payment.

3. Phishing – Taxpayers should be wary of fake IRS emails this tax season. Phishing scams usually involve a strange email and/or website prompting victims to enter personal financial information, which is then stolen and used to file fake tax returns or access financial accounts. Some of these emails can even infect a taxpayer’s computer with malware, allowing scammers to access any sensitive files or track keyboard strokes, exposing login information.

4. Return preparer fraud – Approximately 60% of taxpayers use tax professionals to prepare their returns. Although the vast majority of these professionals provide high-quality service, there are some preparers who perpetrate refund fraud, identity theft and other scams. It is important that taxpayers ask if the preparer has an IRS Preparer Tax Identification Number (PTIN) and check that they include it in their filed tax returns.

5. Offshore tax avoidance – The IRS is cracking down on individuals who have evaded U.S taxes by hiding income in offshore banks, brokerage accounts, or nominee entities. These U.S. taxpayers failing to comply with reporting requirements risk significant penalties. The IRS encourages individuals to come forward to fulfill their tax-filing responsibilities using the Offshore Voluntary Disclosure Program.

6. Inflated refund claims – It’s important to look out for tax preparers promising inflated refunds. Many times, scammers base the refunds on fake Social Security Benefits or false claims for education credits, like the Earned Income Tax Credit (EITC) or the American Opportunity Tax Credit. Be wary of anyone who asks taxpayers to sign a blank return or charges fees based on a percentage of the refund.

7. Fake charities – Several scam groups like to impersonate charitable organizations to attract donations from unsuspecting contributors. Before you make any donation to a charity, check the status of that organization with the IRS. Even if the charity’s name sounds similar to familiar or nationally known organizations, it never hurts to do more research.

8. Falsely padding deductions on returns – Taxpayers may be tempted to inflate income so they can claim “just a little bit more.” However, overstating deductions and falsely claiming credits can result in significant financial penalties and may even result in criminal prosecution. According to IRS Commissioner John Koskinen, “taxpayers should file accurate returns” and “shouldn’t gamble with their taxes by padding their deductions.”

9. Excessive claims for business credits –Before you try to claim a credit, make sure your business actually qualifies. For example, the fuel tax credit is generally not available to most taxpayers – except to those with off-highway businesses like farming. Taxpayers who don’t qualify for the credit, but attempt to claim it in order to increase a tax refund, are committing tax fraud.

10. Falsifying income to claim tax credits – Many scam artists convince taxpayers to invent income to falsely qualify for lucrative tax credits, such as the Earned Income Tax Credit. Remember that you are legally responsible for what is on your tax return.

11. Abusive tax shelters – This scam involves an abusive domestic or foreign trust arrangement, a structure to exploit financial secrecy laws of a foreign jurisdiction or an abusive tax structure using multi-layer financial data to conceal ownership of taxable income. The IRS Criminal Investigation Division (CID) has developed a national program focused on identifying these tax scheme promoters and any other individuals involved.

12. Frivolous tax arguments – Using frivolous tax arguments is an unethical way to avoid paying taxes. Taxpayers who use these outrageous claims are not only disobeying the law, but also disregarding their responsibility to pay taxes. The penalty for filing a frivolous tax return is $5,000.

These tax scams are some of the most common schemes that taxpayers are likely to encounter this year. In some cases, victims of tax scams may be held accountable by the IRS for the information they provide, and they may be subject to civil or criminal penalties. If you suspect you are a victim of a tax scam, contact the IRS to review your return information.