The Internal Revenue Service has issued its annual list of common tax scams to avoid, with tax preparer fraud and phishing schemes topping the list.

"Taxpayers should be wary of anyone peddling scams that seem too good to be true,” IRS Commissioner Doug Shulman said in a statement. “The IRS fights fraud by pursuing taxpayers who hide income abroad and by ensuring taxpayers get competent, ethical service from qualified professionals at home in the U.S.”

The IRS 2010 list of “dirty dozen” tax scams includes:

1. Return preparer fraud: The IRS warned that dishonest tax return preparers can cause trouble for taxpayers by skimming a portion of their clients’ refunds, charging inflated fees, and promising refunds that are too good to be true.

2. Hiding income offshore. The IRS is aggressively pursuing taxpayers involved in abusive offshore transactions as well as tax professionals, promoters, and others who facilitate these schemes. That includes taxpayers with hidden income in offshore banks and brokerage accounts and those using nominee entities, offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities and insurance plans.

3. Phishing. Phishing is a tactic used by scam artists to trick unsuspecting victims into revealing personal or financial information online. IRS impersonation schemes can take the form of e-mails, phony Web sites and now tweets on Twitter.

4. Filing false or misleading forms. Another perennial scam is filing false or misleading tax returns to claim refunds to which taxpayers are not entitled.

5. Nontaxable Social Security Benefits with exaggerated withholding credit. This tactic results in no income reported to the IRS on the tax return, but often both the withholding amount and the reported income are incorrect. Filings of this type may result in a $5,000 penalty.

6. Abuse of charitable organizations and deductions. This scam includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property. The IRS also sees schemes involving the donation of non-cash assets, including situations where several organizations claim the full value for both the receipt and distribution of the same non-cash contribution.

7. Frivolous arguments. Promoters of frivolous schemes encourage people to make unreasonable and outlandish claims to avoid paying the taxes they owe. If a scheme seems too good to be true, it probably is.

8. Abusive retirement plans. The IRS continues to find abuses in retirement plan arrangements, including Roth IRAs. The IRS is looking for transactions that taxpayers use to avoid the limits on contributions to IRAs, as well as transactions that are not properly reported as early distributions.

9. Disguised corporate ownership. Corporations and other entities are being formed and operated in some states for the purpose of disguising the ownership of the business or financial activity by means such as improperly using a third party to request an employer identification number. The IRS is working with state authorities to identify these entities and to bring the owners into compliance.

10. Zero wages. Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. Filings of this type of return may result in a $5,000 penalty.

11.  Misuse of trusts. For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts to avoid income tax liability and hide assets from creditors, including the IRS. The IRS has recently seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses.

12. Fuel tax credit scams. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But others are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim and potentially subjects fraudsters to a $5,000 penalty.


Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access