IRS Reveals This Year's Dirty Dozen Tax Scams

Every year, the IRS releases its “Dirty Dozen” list of fraudulent tax practices that refund filers should be aware of. While these offenses occur year-round, the IRS stated they tend to happen more frequently and in greater numbers during filing season.

"The IRS has stepped up its efforts to protect taxpayers from a wide range of schemes, including moving aggressively to combat identity theft and refund fraud," said Steve Miller, acting commissioner of the IRS.

The agency's initiatives to crack down on crime were demonstrated on Monday, when a separate report from the IRS revealed it investigated a significant bulk of high-income tax refund claims in fiscal 2012. Individual returns for incomes of $1 million or higher saw an inspection rate of 12 percent, compared to less than 3 percent for filers who earned less than $1 million and more than $200,000.

This year’s list includes:

• Identify Theft.  The prevalence of this crime is significant enough Hollywood was able to make a comedy movie about it. In fact, Forbes noted this is the second year in a row identify theft ranked in first place among the Dirty Dozen.  The IRS explains in most cases, criminals use an individual's Social Security number or other info and fraudulently file a return and claim a refund in his or her name. To crack down on identity theft, the IRS has roughly 3,000 employers working specifically on detection, prevention and victim assistance. In 2012, the agency prevented $20 billion in fraudulent claims from being issued, up from $14 billion the year before.

• Phishing and Return Preparer Fraud.  No. 2 and 3 on the IRS's list involve taxpayers being duped by fakers. Phishing occurs when people receive an unsolicited email or are directed to a website created by criminals to steal personal information, allowing them to commit identity and/or financial theft.  With 60 percent of taxpayers expected to seek help from a tax preparer this year, the IRS is practically begging filers to be careful when placing sensitive information in the hands of service providers. The fifth and sixth Dirty Dozen scams reported by the IRS are similar to phishing and phony preparers. Taxpayers are advised to stay away from "free money" offers in ads and flyers, which are signs of perpetrators trying to prey on low-income filers. No. 6 involved criminals impersonating charitable organizations, which commonly occurs after natural disasters.

• Harboring Income on the Other Side of the Border.  A major concern for the IRS is individual filers who hide income offshore in foreign banks, brokerage accounts or nominee entities or by using debit or credit cards and wiring transfers abroad to protect their money from being taxed.  Storing money in foreign countries becomes unlawful when individuals don't disclose information about it to the IRS, which is why it earned a ranking of fourth place in the Dirty Dozen. Since 2009, 39,000 people have voluntarily provided information about their financial standings abroad, according to the IRS, which opened the Offshore Voluntary Disclosure Program in 2012.  Keeping cash abroad isn't just a problem the IRS has with individual filers. According to The Wall Street Journal, an analysis of 60 large U.S. companies determined their combined revenues being kept outside the states added up to $166 billion, which was roughly 40 percent of their total profits.
• And six more.  The other major fraudulent activities listed by the IRS included falsifying income or inflating expenses, sending in fake 1099 forms, making "frivolous" claims, falsely claiming zero wages, disguising corporate ownership and misusing trusts.

by Dave McClure, Industry Writer