TAX NEWS - 2010

IRS warns of common tax scams

IRS warns taxpayers of its list of "dirty dozen" tax scams, including two that have greatly increased in frequency -- offshore banking and identity theft scams.

Following are the IRS' "dirty dozen":

1. Offshore Transactions - Some utilize offshore transactions to avoid paying U.S. income tax. Taxpayers involved in these schemes are subject to payment of taxes plus interest, penalties and potential criminal charges. This is a serious crime and the IRS will prosecute offenders. The bottom line is that everyone must pay their share of federal taxes.

2. Identity Theft - The IRS warns of at least two identity theft scams involving taxes or the IRS. Either tax preparers use personal information, such as social security numbers and financial information, from their clients' tax returns to steal an identity for fraudulent purposes; or con-artists send out fictitious bank mail/email and IRS forms to trick taxpayers into disclosing personal and banking data. The IRS will never ask for your personal information in this way.

3. Fake Tax Payment Checks – The cons sell fictitious negotiable instruments that look like bona fide checks to pay tax liabilities, mortgages,or other debts. The con artists may even counsel clients to use the phony check to overpay taxes so they can ostensibly receive a refund from the IRS. These false checks are called "sight drafts" and are worthless. It is a crime to use sight drafts to pay a tax liability or any other debt.

4. African-Americans Get a Special Tax Refund - Thousands of African Americans have been conned in the past by scammers offering to file for tax credits or refunds as reparations for slavery. There is no such tax credit or refund in federal tax law. Of course scammers ask for a fee to file for this "credit" on behalf of unwary taxpayers.

5. No Taxes Withheld From Wages - Another scam instructs employers not to withhold federal income tax or employment taxes from their employees' wages. Based on a false interpretation of tax law, these scams have been refuted in court. Taxpayers who are concerned about their employment taxes can call the IRS at 800.829.1040.

6. Improper Home-Based Business – Con-artists offer tax "relief" to small- or home-based businesses, claiming that individual taxpayers can deduct most, if not all, of their personal expenses as business expenses by setting up a fake home-based business. This is illegal and criminal tax avoidance. The U.S. tax code explicitly states that a business purpose and profit motive must exist for legitimate, allowable business expenses.

7. Pay the Tax; Get the Prize - You've won a prize and all you have to do is pay the income tax to get it. Don't fall for it. If you've actually won a prize, you may need to make a payment to cover the taxes due at the end of the year, but the payment goes to the IRS – not to the caller or anyone else.

8. Frivolous Arguments - When someone says "I don't pay taxes – why should you," be aware that these are scams. Everyone must pay their taxes. Scammers even advertise on the Internet, incorrectly claiming that paying taxes is "voluntary." The U.S. courts have continuously rejected this argument as invalid.

9. Social Security Tax Scheme – Don't fall for the scam offering refunds on Social Security taxes. The con-artists offers a victim a "paperwork" fee of $100, plus a percentage of any refund received, to file the bogus refund claim with the IRS. The law does not allow for such a refund of Social Security taxes.

10. "I Can Get You a Big Refund ...for a Fee!" -- Scammers approach someone wanting to "borrow" their social security number or offering a phony W-2 so it appears that the person qualifies for a big refund, promising to split the proceeds. What actually happens is that the victim usually winds up paying the refund back along with penalties and interest.

11. Share/Borrow EITC Dependents - Unscrupulous tax preparers "share" one client's qualifying children with another client in order to allow both clients to claim the Earned Income Tax Credit. The IRS prosecutes such fraudulent claims, and participating in one could subject to civil and criminal penalties.

12. IRS "Agent" Comes To Your House To Collect – Never let anyone into your home unless they identify themselves to your satisfaction. IRS special agents, field auditors, and collection officers carry picture IDs and will usually contact you before they visit. If you suspect you have an imposter on your doorstep, lock your door and call the police. To report IRS imposters, call the Treasury Inspector General's Hotline at 800.366.4484.

The IRS and other federal agencies are aggressively pursuing and successfully prosecuting these schemes. This can result in imprisonment, fines, and repayment of the original taxes owed plus interest and penalties. Even innocent taxpayers victimized by these schemes may face significant interest and penalties.

The best advice for taxpayers is caveat emptor: buyer beware. If something sounds too good to be true, it probably is.

Taxpayers who suspect tax fraud can report it to the IRS at 800.829.0433.