Bad Eggs: The “Dirty Dozen” Scams for 2012

Each year the IRS lists its “Dirty Dozen” tax scams for taxpayers to watch out for. What’s on the list for 2012? Here is a quick summary.

1. Identity theft: The IRS is now focused on preventing, detecting and resolving identity theft issues, including cases where false tax returns were filed to obtain refunds.

2. Phishing: Typically, criminals will “phish” by sending a fraudulent e-mail to gain access to personal information. They use the information for nefarious means.

3. Tax return preparer fraud: Most tax return preparers are honest, but dishonest ones may skim a client’s refund, charge inflated fees for services, or promise guaranteed or inflated refunds.

4. Offshore income: Individuals may evade U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities, using debit cards, credit cards or wire transfers to access the funds. Other ploys involve foreign trusts, employee-leasing schemes, private annuities and insurance plans.

5. “Free money” ads: Advertisements for free money from the IRS, suggesting that a taxpayer can file a tax return with little or no documentation, have been making the rounds. These schemes often depend on word of mouth by unsuspecting perpetuators.

6. False income and expenses: This scam features income that was never earned, either as wages or self-employment income, to maximize refundable credits. It could result in interest and penalties and, in some cases, criminal prosecution.

7. Form 1099 refund claims: In this scam, the con artist files a fake information return on a Form 1099 to warrant a false refund claim on a corresponding tax return.

8. Frivolous arguments: Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has created a list of frivolous tax arguments that taxpayers should avoid.

9. Zero wage claims: Filing a phony information return is an illegal way to reduce income tax liability. Usually a substitute W-2 or corrected Form 1099 is used to bring taxable income down to zero.

10. Charitable organizations: IRS examiners continue to uncover the intentional abuse of 501(c) (3) organizations, including arrangements that improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or their income.

11. Corporate ownership: Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business. These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and further money laundering.

12. Misuse of trusts: Although there are legitimate ways to use trusts for tax and estate planning, suspect transactions may promise reduction of taxable income, create deductions for personal expenses and provide reduced estate- or gift-tax liability.

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