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Stay Clear of the “Dirty Dozen” Tax Scams

By Toolkit Staff | April 16, 2013

If you’re like most people, you want to pay as little as possible in taxes. However, if you don’t enjoy tax audits, you’ll want to check the IRS’s “Dirty Dozen” list of tax scams, to make sure you’re not relying on one of these scams to lower your taxes. Participating in schemes like these could land a person in serious trouble, including penalties, interest, and possibly even criminal prosecution.

Each year, the IRS compiles its list of the most egregious schemes that it has on its radar for year. The 2013 “Dirty Dozen” includes identity theft, phishing, return preparer fraud, hiding income in offshore accounts, and “free money” scams.

“The Dirty Dozen list shows that scams come in many forms,” warns the IRS Acting Commissioner Steven T. Miller. “Don’t let a scam artist steal from you or talk you into doing something you will regret later.”

Identity Theft and Phishing

Identity theft tops this year’s “Dirty Dozen” list of tax scams. Identity theft occurs when someone uses an unsuspecting individual’s name, Social Security number, other information without permission in order to commit fraud or other crimes.

Tax fraud through identity theft poses a serious danger at tax time. A criminal can use someone else’s information to file a fraudulent tax return and collect a refund, leaving the victim with the dreadful task of untangling the mess—most likely through costly and time consuming administrative and legal proceedings.

Phishing is a scam that tries to trick you into providing your personal or financial information to the wrong party. Typically it involves unsolicited communications that impersonate the IRS (these schemes are popular year round, and even more so during tax season). Once you provide your information, the scam artist can use it to commit identity theft or financial theft.

Work Smart

The IRS never initiates contact through email, text messages, or social media channels. If you receive an unsolicited text, email, or social media communication saying it is from the IRS, it is not legitimate. It is a phishing scam!

If you receive an unsolicited email that appears to be from the IRS, the IRS recommends you report it by sending it to phishing@irs.gov.

Hiding Income Offshore

Abusive offshore transactions are another item on the IRS’s list. The IRS aggressively pursues the promoters and others involved in facilitating these schemes, as well as the taxpayers involved. Taxpayers have tried to avoid or evade U.S. taxes by hiding income in offshore banks, brokerage accounts, or nominee entities. Also, these schemes include using wire transfers, debit cards or credit cards to access funds. Also popular is using foreign trusts, private annuities, insurance plans, or employee-leasing schemes.

Work Smart

Not all offshore trusts and accounts are fraudulent tax evasion. It is imperative to work with a reputable and qualified professional who can leverage planning opportunities without crossing a line that could lead to civil and criminal penalties.

For legitimate foreign accounts, reporting requirements need to be fulfilled. Also, new foreign account reporting requirements are being phased in over the next few years that make it increasingly difficult to hide income offshore.

The IRS has a special initiative for those with undisclosed income from offshore accounts, who want to get back into compliance with the U.S. tax system. It reopened its Offshore Voluntary Disclosure Program (OVDP) at the beginning of 2012 and is keeping the program open for an indefinite period. Information about OVDP is available on the IRS website.

Return Preparer Fraud and “Free Money” Scams

Most return preparing professionals provide honest, excellent service to their clients. However, some dishonest and unscrupulous preparers can land their clients in big trouble. To help protect yourself, make sure you choose carefully when hiring a preparer. You are responsible for what is on your tax return, even if you hire someone else to prepare the return.


The IRS has created a new web page with tips about choosing a preparer: www.irs.gov/chooseataxpro.

In another type of scam, con artists prey on the unsuspecting by charging them money to claim non-existent refunds. They commonly target people with little or no income who do not normally have to file a return. By the time the refund claim is denied, the scammers are long gone. A similar scam involves promises of non-existent Social Security refunds or rebates.

Impersonating Charitable Organizations

A type of fraud commonly seen in the wake of natural disasters is impersonating charitable organizations. This scam usually involves using bogus charities to solicit money or financial information from well-intentioned taxpayers. Some scammers may even contact the victims themselves and claim to be working for the IRS. The personal information obtained can then be used to steal another’s identity.


Disaster victims can call the IRS toll-free disaster assistance number, 1-866-562-5227, with questions about tax relief or disaster-related tax issues.

The IRS provides the following tips to help avoid these types of scams:

  • Use the “Select Check” feature on the IRS website to find legitimate, qualified charities to which donations may be tax deductible
  • Do not give personal financial information (e.g., bank account or credit card numbers, Social Security numbers, etc.) to anyone who solicits a contribution
  • Donate to recognized charities
  • Contribute by check or credit card rather than sending cash

Inflated Expenses and False Refund Claims

Also on the IRS list this year is false or inflated income or expenses. Although most taxpayers try to reduce their income, this scam involves claiming income that never existed or was never earned. The inflated income is used to claim erroneous refunds or the Earned Income Tax Credit.

The fuel tax credit is another credit which is often claimed erroneously. Farmers and others who need to use fuel for off-highway business expenses are rightfully entitled to fuel tax credits. However, claiming the credit when you are not eligible may be considered a frivolous tax claim, with a resulting $5,000 penalty.

Another type of scam involves filing fake Forms 1099-OID, Original Issue Discount, based on the notion that the federal government maintains secret accounts for U.S. taxpayers. The forms are used to support the false refund claims.

Frivolous Arguments and "Zero" Wages

Promoters of frivolous schemes often encourage people to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous legal positions that taxpayers should avoid. Among these frivolous arguments are

  • Filing a tax return or paying tax is voluntary
  • The taxpayer is not citizen of a state, not the United States
  • The Constitutional amendment imposing the federal income tax was never properly ratified

If you try to use any of these arguments, expect to face stiff penalties and possible prosecution instead of a lower tax bill. These arguments are false and have already been thrown out of court.

Other tricks involve filing a phony substituted Form W-2 or a “corrected” Form 1099 to replace a legitimate information return, in an effort to reduce taxable income to zero. Again, the IRS cautions taxpayers to avoid these “zero” wage claims and any variations of this scheme. Filing this type of return could result in a penalty of $5,000.

Disguised Corporate Ownership and Fraudulent Use of Trusts

Some scammers form corporations and improperly use third parties to request employer identification numbers. There are many valid reasons to select a state for incorporating your business or forming your LLC. However, you will find yourself on the wrong side of the law if you attempt to camouflage the ownership of the corporation or LLC in order to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions, and facilitate money laundering and financial crimes. In recent years, the IRS has stepped up its cooperation and partnerships with state authorities to track down these disguised corporations.

A trust is another vehicle popular in its misuse among scammers. When established by a knowledgeable and reputable tax professional, trusts can play a key role in effective planning. Unfortunately, unscrupulous promoters have urged taxpayers to transfer assets into trusts that rarely deliver the results promised. These highly questionable transactions often promise deductions for personal expenses and reduced income or estate and gift taxes. Not only are these shady trusts unlikely to provide any tax benefits, they may cost you significant amounts of interest and penalties when the IRS invalidates them. In particular, there’s been a recent increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, you should seek the advice of a trusted professional before entering a trust arrangement.

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