Slideshow The Dirty Dozen: 12 ways clients run afoul of the IRS

Published
  • February 23 2017, 3:42pm EST
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In this time of great change, it’s possible to find peace in the things that remain constant — one of them being that someone will always try to manipulate tax files to steal money. The IRS again this year offers its annual and updated list of Dirty Dozen scams, a variety of common schemes that peak during filing season. Some are perpetrated by taxpayers who know they are taking liberties. In other cases, scammers have convinced clients there are loopholes for their own profit.

Here they are, in reverse order.

12. Shorely you can’t be serious?

Hiding cash in unreported offshore accounts is a perennial favorite of those who seek to avoid paying taxes. The IRS is on to the scam. Since the first Offshore Voluntary Disclosure Program opened in 2009, there have been more than 55,800 disclosures and the agency has reaped more than $9.9 billion from this initiative. Stick to vacations only in faraway lands.

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11. “Thank goodness I don’t have to pay taxes!”

11) Ever have a client refuse to pay taxes on religious or moral grounds, or one who thought that only government employees were subject to federal income tax? Taxpayers should avoid making outlandish legal claims to get out of paying up. The tab for filing a frivolous return is $5,000 — plus the risk of having the excuse show up as an example on a future IRS Dirty Dozen list.

10. Not in good hands at all

10) For the third consecutive year, the IRS places abusive micro-captive insurance tax shelters on its list. Yes, tax law generally allows businesses to create “captive” insurance companies to protect against certain risks. In abusive “micro-captive” structures, scammers persuade owners of closely held entities to participate in schemes that lack many of the attributes of genuine insurance.

9. Living proof

“Taxpayers should ensure all the information they provide on their tax return is accurate,” says IRS Commissioner John Koskinen, in a statement. Maybe nowhere on a return should a taxpayer tow the bottom line more than when reporting income. Fudging here to qualify for credits again makes the Dirty Dozen; the IRS also warns against schemes disguised as a debt payment option for credit cards or mortgage debt.

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8. “I can deduct my cat’s psychotherapy, right?”

The Dirty Dozen wags a finger at overstating deductions such as charitable contributions, padding business expenses or including undeserved credits. The penalties are big and scary: 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,” and a possible penalty of 75% of the amount owed. Better a taxpayer’s cat just stays depressed.

7. Gassing on

What firm doesn’t appreciate tax goodies such as the fuel use or research credits? Thing is, the former is generally limited to off-highway business use or use in farming. So unless your client drives a John Deere to work, he or she is probably out of luck. And the IRS continues to see “significant misuse” of the research credit, often when a company claims yes, it did change the world but failed to keep the right documentation to back up that claim.

6. Refund madness

Some tax preparers claim they’ll get a client five figures back from the government. This hogwash won’t disappear quickly because there are a number of tools at a scammer’s disposal: tax credits, smooth talk and clients’ greed. “Individuals have made refund claims,” said the IRS, “based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms.” Maybe we can add to the list of tools “plain old stupidity.”

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5. Give until it hurts

“Fake charities set up by scam artists to steal money or personal information are a recurring problem,” says Koskinen. Be wary of charities with names similar to familiar or nationally known organizations. Last year, we wondered about “Shave the Children.” This year’s whole Dirty Dozen makes us wonder if the second “A” in ASPCA stands for “accountants.”

4. Bad apples dept.

Be on the outlook for unscrupulous preparers who do more than swipe clients’ money: They also pollute a good profession. Most tax professionals provide honest, high-quality service, according to the IRS, “but there are some dishonest preparers who set up shop each filing season to perpetrate refund fraud.”

3. Who knows?

You may have heard of the 10-year-old dunned for college debt, and the young woman pestered for credit card accounts she allegedly ran up 40 years earlier. ID theft makes the Dirty Dozen again this year. Computers, and the scammers who use them, are constantly growing smarter at connecting us not only with folks we know, but those we don’t.

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2. Closing the ring

It’s a special kind of threat when your own phone becomes your enemy. That’s why aggressive calls by criminals impersonating IRS agents make this year’s list. Arrest, deportation, license revocation, the rack: The list of scammers’ threats continues to grow — most preying on the wrong, seemingly undying notion that the IRS routinely starts contact with taxpayers via a dial tone.

1. Taking the bait

Fake emails or websites trying to steal personal information are the bottom feeders of our internet experience — and the IRS puts phishing at the top of its Dirty Dozen after reports of a big spike in phishing and malware incidents during the 2016 tax season. Evolving schemes now ensnare not only grandma, but also tax and payroll professionals, HR personnel and schools for money, passwords, SSNs and other info that can ignite ID theft.