In our last post, we laid out this year’s “Dirty Dozen” tax scams as ranked by the Internal Revenue Service. The annual list looks at the worst scams likely to beset taxpayers and tax pros during the coming year.

While awareness is the first step toward defense, we thought we’d revisit the “Dirty Dozen” list with an eye toward how best to avoid falling victim to each bad actor in our line-up. So here’s our “Dirty Dozen” revisited: Avoiding the Dirty Dozen.

Phishing

This scam relies on unsolicited emails or other communications that try to trick the recipient into divulging passwords, SSNs or other information that can be used to file bogus tax returns.

Your best defense against a phishing “expedition” is a healthy dose of suspicion. Be wary of any electronic communication that comes to you unsolicited that claims to be from the IRS. Be sure to verify by phone that an email was indeed sent by the IRS or not, but use the phone number on the IRS website – NOT one provided by the email.

If a taxpayer receives an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), they should report it by sending it to phishing@irs.gov. Learn more by going to the Report Phishing and Online Scams page on IRS.gov.

Tax professionals who receive unsolicited and suspicious emails that appear to be from the IRS or related to the e-Services program also should report it by sending it to phishing@irs.gov.

It is important to keep in mind the IRS generally does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.

Phone Scams

This scheme involves calling the taxpayer or professional, and masquerading as an IRS official.

There are some things the scammers often do, but the IRS will not do. Taxpayers should remember that any one of these is a tell-tale sign of a scam. The IRS will never:

• Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail a bill to any taxpayer who owes taxes.
• Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.
• Demand that taxes be paid without giving taxpayers the opportunity to question or appeal the amount owed.
• Ask for credit or debit card numbers over the phone.
• Call you about an unexpected refund.

If you get a suspicious call with one or more of these “red flags,” do not give out any information. Hang up immediately. Contact the Treasury Inspector General for Tax Administration (TIGTA) to report the call. Use their IRS Impersonation Scam Reporting web page. Or call 800-366-4484.

If you think you might owe tax due, call the IRS at 800-839-1040. The IRS operators can help.

Identity Theft

Using stolen Social Security numbers to file bogus tax returns to get a big refund is called tax-related identity theft, and it’s a crime.

The IRS and its partners remind taxpayers and tax professionals that they can do their part to help in this effort. Taxpayers and tax professionals should:

• Always use security software with firewall and anti-virus protections. Make sure the security software is always turned on and can automatically update. Encrypt sensitive files such as tax records stored on the computer. Use strong passwords.
• Learn to recognize and avoid phishing emails, threatening phone calls and texts from thieves posing as legitimate organizations such as banks, credit card companies and government organizations, including the IRS. Do not click on links or download attachments from unknown or suspicious emails.

Return Preparer Fraud

It is important to choose carefully when hiring an individual or firm to prepare a tax return. Well-intentioned taxpayers can be misled by preparers who don’t understand taxes or who mislead people into taking credits or deductions they aren’t entitled to claim. Scam preparers may take this step in order to increase their fee. Every year, these types of tax preparers encounter everything from stiff penalties to jail time for defrauding their clients.

Here are a few tips for taxpayers to consider to help avoid a fraudster when choosing a tax preparer:

• Avoid fly-by-night preparers. Make sure the preparer will be available if needed, even after the return is filed. In the event questions come up about a tax return, taxpayers may need to contact the preparer.
• Ask if the preparer has an IRS Preparer Tax Identification Number (PTIN). Paid tax return preparers are required to register with the IRS, have a PTIN and include it on tax returns.
• Inquire whether the tax return preparer has a professional credential (enrolled agent, certified public accountant or attorney), belongs to a professional organization or attends continuing education classes.
• Provide records and receipts. Good preparers will ask to see tax records and receipts. They’ll ask questions to determine the client’s total income, deductions, tax credits and other items. Do not rely on a preparer who is willing to e-file a return using a pay stub instead of a Form W-2. This is against IRS e-file rules.
• Review the tax return before signing and never sign a blank return. Don’t use a tax preparer who asks clients to sign an incomplete or blank tax form.

Fake Charities

As many Americans that are willing to help various charities and relief efforts, there are just as many scammers out there who create fake charities to trick potential givers into giving them money.

The IRS has these suggestions for potential donors to charities or relief campaigns:

• Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, that allows people to find legitimate, qualified charities to which donations may be tax-deductible. Legitimate charities will provide their Employer Identification Number (EIN), if requested, which can be used to verify their legitimacy through the IRS Select Check.
• Don’t give out personal financial information, such as Social Security numbers or passwords, to anyone who solicits a contribution. Scam artists may use this information to steal identities and money from victims. Be cautious when disclosing credit card numbers to those seeking a donation. Confirm that those soliciting a donation are calling from a legitimate charity.
• Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the donation.

Inflated Refund Claims

Scam artists preparing taxes frequently promise taxpayers “big” refunds and appear to deliver; except that the refunds are due to inflated claims for refunds for which the taxpayer might not qualify. The scammer and the taxpayer might both be in for a nasty legal shock later. Perpetrators can face penalties, interest and criminal charges.

For taxpayers the advice is to steer clear of promises of refunds “too good to be true.” They usually are. The IRS reminds taxpayers that they are legally responsible for what’s on their return even if it was prepared by someone else. Taxpayers who buy into such schemes can end up being penalized for filing false claims or receiving fraudulent refunds.

Honest tax preparers provide their customers a copy of the tax return they’ve prepared. Scam victims frequently are not given a copy of what was filed. Victims also report that the fraudulent refund is deposited into the scammer’s bank account. The scammers deduct a large “fee” before paying victims, a practice not used by legitimate tax preparers.

Excessive Claims for Business Credits

In many ways, the dangers of inflated business credits are somewhat similar to those for individual taxpayers. The credits are different, but the scammer’s tactics may not be.

Avoid improperly claiming the fuel tax credit, a tax benefit generally not available to most taxpayers. The credit is usually limited to off-highway business use, including use in farming. Filers should also avoid misuse of the research credit. Improper claims often involve failures to participate in or substantiate qualified research activities or satisfy the requirements related to qualified research expenses.

Falsely Padding Deductions on Returns

To scammers and to taxpayers who inflate deductions in order to rake in more money from the IRS, the old adage, “less is more,” just doesn’t cut it. They falsify legitimate deductions – or claim deductions that the return doesn’t support – for a bigger refund.

Preparing an accurate tax return is a taxpayer’s best defense against scams – and the best way to avoid triggering an audit. The IRS reminds taxpayers that significant penalties may apply for taxpayers who file incorrect returns including:

• 20 percent of the disallowed amount for filing an erroneous claim for a refund or credit.
• $5,000 if the IRS determines a taxpayer has filed a “frivolous tax return.” A frivolous tax return is one that does not include enough information to figure the correct tax or that contains information clearly showing that the tax reported is substantially incorrect.
• In addition to the full amount of tax owed, a taxpayer could be assessed a penalty of 75 percent of the amount owed if the underpayment on the tax return resulted from tax fraud.

Taxpayers may be subject to criminal prosecution and be brought to trial for actions such as willful failure to file a return; supply information; or pay any tax due; fraud and false statements; preparing and filing a fraudulent return and identity theft.

Falsifying Income to Claim Credits

Scammers love a bigger refund, so they’re not above inflating income figures to get it.

This scam involves inflating or including income on a tax return that was never earned, either as wages or self-employment income, usually to maximize refundable tax credits. Sometimes the scammer files bogus Forms 1099-MISC or a made-up financial instrument as “proof.”

Much like falsely claiming an expense or deduction is improper, claiming income the taxpayer didn’t earn is also inappropriate. Unscrupulous return preparers and people do this to secure larger refundable credits such as the Earned Income Tax Credit and it can have serious repercussions.

Remember, taxpayers can face a large bill to repay the erroneous refunds, including interest and penalties. In some cases, they may even face criminal prosecution.

Abusive Tax Shelters

This one differs from other scams in that it’s not typically done by some third party out without the knowledge of the taxpayer. Most times, everybody’s in on this one.

The big issue with this tax scam is the creation of a “micro-captive” insurance firm to act as a vehicle for generating tax breaks. This, the IRS says, has been backed up by recent U.S. Tax Court rulings.

In Notice 2016-66 (Nov. 1, 2016), the IRS advised that micro-captive insurance transactions have the potential for tax avoidance or evasion. The notice designated transactions that are the same as or substantially similar to transactions that are described in the notice as “Transactions of Interest.” The notice established reporting requirements for those entering into such transactions on or after Nov. 2, 2006, and created disclosure and list maintenance obligations for material advisors.

Separately, Congress has also acted to curb micro-captive abuses. The Protecting Americans from Tax Hikes (PATH) Act, effective Jan. 1, 2017, established strict diversification and reporting requirements for new and existing captives.

Frivolous Tax Arguments

Like the previous entry, this scam typically includes the cooperation of the taxpayer.

A frivolous tax argument is any bogus reason cited by a taxpayer claiming that they are not bound by U.S. tax law. In “The Truth about Frivolous Tax Arguments,” the IRS outlines some of the more common frivolous arguments, explains why they’re wrong and cites relevant court decisions. Examples include:

• The First Amendment allows taxpayers to refuse to pay taxes on religious or moral grounds;
• The only “employees” subject to federal income tax are those who work for the federal government;
• Only foreign-source income is taxable.

Perpetrators of illegal scams, as well as those who make use of them, may face possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice to shut down scams and prosecute the criminals behind them.

Taxpayers have the right to contest their tax liabilities using IRS administrative appeals procedures or in court, but they are still obligated to follow the law.

Offshore Tax Avoidance

Hiding money or assets in unreported offshore accounts to avoid taxes is nearly as old as the income tax system itself. Over the years, numerous individuals have been identified as evading U.S. taxes by attempting to hide income in offshore banks, brokerage accounts or nominee entities. They then access the funds using debit cards, credit cards or wire transfers. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as bankers and others suspected of helping clients hide their assets overseas.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting requirements are breaking the law and risk significant fines, as well as the possibility of criminal prosecution.