TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

The Internal Revenue Service recently issued its annual “Dirty Dozen” list of tax scams (IR-2014-16, Feb. 19, 2014), compiled each year identifying a variety of common scams taxpayers can encounter at any point during the year. Seehttp://www.irs.gov/uac/Newsroom/IRS-Releases-the-“Dirty-Dozen”-Tax-Scams-for-2014;-Identity-Theft,-Phone-Scams-Lead-List  Many of these schemes peak during filing season as people prepare their tax returns.

“Taxpayers should be on the lookout for tax scams using the IRS name,” said IRS Commissioner John Koskinen. “These schemes jump every year at tax time. Scams can be sophisticated and take many different forms. We urge people to protect themselves and use caution when viewing e-mails, receiving telephone calls or getting advice on tax issues.”

For 2014, the Dirty Dozen tax scams include:

IDENTITY THEFT – Identity theft is the unauthorized use of the personal information of another, such as their name, Social Security number (SSN) or other identifying information to commit fraud or other crimes. In many cases, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.

The IRS has a special section on IRS.gov dedicated to identity theft issues, including YouTube videos, tips for taxpayers and an assistance guide. For victims, the information includes how to contact the IRS Identity Protection Specialized Unit. For other taxpayers, there are tips on how taxpayers can protect themselves against identity theft.

Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately by calling the IRS Identity Protection Specialized Unit at 800-908-4490.

TELEPHONE SCAMS – There has been a significant increase in phone scams across the country, with callers pretending to be from the IRS in hopes of stealing money or identities from victims. These phone scams include many variations, ranging from instances from where callers say the victims owe money or are entitled to a refund. Some calls can threaten arrest and threaten a driver’s license revocation. Sometimes these calls are paired with follow-up calls from people saying they are from the local police department or the state motor vehicle department.

Characteristics of these scams can include:

• Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
• Scammers may be able to recite the last four digits of a victim’s Social Security Number.
• Scammers “spoof” or imitate the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
• Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
• Victims hear background noise of other calls being conducted to mimic a call site.

After threatening victims with jail time or a driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

In another variation, mostly targeting recent immigrants, victims are told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting.

If you get a phone call from someone claiming to be from the IRS, do NOT call them back. Instead:

•  If you owe taxes or you think you might owe taxes, call the IRS at 800-829-1040. The IRS employees at that line can help you with a payment issue – if there really is such an issue.
•  If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill from the IRS or the caller made some bogus threats as described above), call and report the incident to the Treasury Inspector General for Tax Administration (TIGTA) at 800-366-4484.

If you’ve been targeted by these scams, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov and add “IRS Telephone Scam” to the comments of your FTC complaint.

PHISHING – Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information to be used for identity theft or financial theft. The IRS does not initiate contact with taxpayers by email, text messages and social media channels to request personal or financial information.

If you receive 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), report it by FORWARDING it to phishing@irs.gov.

FALSE PROMISES OF “FREE MONEY” FROM INFLATED REFUNDS – Scam artists routinely pose as tax preparers during tax time, luring victims in by promising large federal tax refunds or refunds that were due in the first place. Scam artists use flyers, advertisements, phony store fronts and even word of mouth to throw out a wide net for victims. They may even spread the word through community groups or churches. Scammers often prey on people who do not have a filing requirement, such as low-income individuals or non-English speakers.

Scammers build false hope by making claims for fictitious rebates, benefits or tax credits or by filing a false return in a person’s name and the person never knows that a refund was paid. Scam artists also victimize people with a filing requirement and due a refund by promising inflated refunds based on fictitious Social Security benefits and false claims for education credits, the Earned Income Tax Credit (EITC), or the American Opportunity Tax Credit, among others.

The IRS sometimes hears about scams from victims complaining about losing their federal benefits, such as Social Security benefits, certain veteran’s benefits or low-income housing benefits. The loss of benefits was the result of false claims being filed with the IRS that provided false income amounts.

Most tax preparers provide their clients with a copy of the tax return they’ve prepared, victims of scam 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. Taxpayers who participate in such schemes can end up being penalized for filing false claims or receiving fraudulent refunds.

RETURN PREPARER FRAUD –  The majority of taxpayers use paid tax professionals to prepare their tax returns. It is important to choose carefully when hiring an individual or firm to prepare your return. The IRS reminds all taxpayers that they should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs). The IRS also has a web page to assist taxpayers. For tips about choosing a preparer, details on preparer qualifications and information on how and when to make a complaint, view IRS Fact Sheet 2014-5, IRS Offers Advice on How to Choose a Tax Preparer.

IRS.gov has general information on reporting tax fraud. More specifically, you report abusive tax preparers to the IRS on Form 14157, Complaint: Tax Return Preparer. Download Form 14157 and fill it out or order by mail at 800-TAX FORM (800-829-3676). The form includes a return address.

CONCEALING INCOME OFFSHORE – While there are legitimate reasons for maintaining financial accounts abroad, there are various filing and reporting requirements that must be satisfied. U.S. taxpayers who maintain such accounts and who do not comply with reporting requirements risk significant penalties and fines, as well as the possibility of criminal prosecution. The government has identified numerous situations of U.S. individuals concealing funds in offshore banks, brokerage accounts or nominee entities and then using debit cards, credit cards or wire transfers to access the funds. Others use foreign trusts, employee-leasing schemes, private annuities or insurance plans for a similar purpose.

The IRS identifies taxpayers with undeclared foreign accounts through information obtained in its investigations of other taxpayers, banks and advisors suspected of helping clients conceal their assets overseas. At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. This program will be open for an indefinite period until otherwise announced.

IMPERSONATION OF CHARITABLE ORGANIZATIONS – Following significant natural disasters, scam artists tend to impersonate charities to get money or private information from well-intentioned taxpayers. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.

The IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips:

• To help disaster victims, donate to recognized charities.
• 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, to help you locate legitimate, qualified charities to which donations may be tax-deductible.
• Don’t give out personal financial information, such as Social Security numbers or credit card and bank account numbers and passwords, to anyone who solicits a contribution from you.
• 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 gift.

Call the IRS toll-free disaster assistance telephone number (866-562-5227) if you are a disaster victim with specific questions about tax relief or disaster related tax issues.

FALSE INCOME, EXPENSES OR EXEMPTIONS – Another scam involves inflating or including income on a tax return that was never earned, either as wages or as self-employment income in order to maximize refundable credits. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could result in repaying the erroneous refunds, including interest and significant penalties, and in some cases, even prosecution.

Additionally, the IRS has identified the filing of excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. But other individuals have claimed the tax credit although they were not eligible.

FRIVOLOUS ARGUMENTS – Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. Those who promote or adopt frivolous positions risk a variety of penalties.  For example, taxpayers could be responsible for an accuracy-related penalty, a civil fraud penalty, an erroneous refund claim penalty, or a failure to file penalty. The Tax Court may also impose an additional penalty against taxpayers who make frivolous arguments in court. Persons who promote frivolous arguments and those who assist taxpayers in claiming tax benefits based on frivolous arguments may be prosecuted for a criminal felony.

FALSELY CLAIMING ZERO WAGES OR USING A FALSE FORM 1099 – Filing a phony information return is an improper method of attempting to lower your taxes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used to improperly reduce taxable income to zero. The taxpayer sometimes also submits a statement rebutting wages and taxes reported by a payer to the IRS.

Sometimes, people include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme.

Some people also attempt fraud using false Form 1099 refund claims. In some cases, individuals have made refund claims based on the false 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 to the IRS. In this situation, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return. Don’t claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns.

ABUSIVE TAX STRUCTURES – Abusive tax schemes have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions.

IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax schemes. CI’s primary focus is on the identification and investigation of the tax scheme promoters as well as those who play a substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax scheme (e.g., accountants, lawyers). Secondarily, but equally important, is the investigation of investors who knowingly participate in abusive tax schemes.

What is an abusive scheme? The IRS Abusive Tax Schemes program encompasses violations of the Internal Revenue Code (IRC) and related statutes where multiple flow-through entities are used as an integral part of the taxpayer’s scheme to evade taxes.  These schemes are often characterized by layering of multiple Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and other similar instruments for the primary purpose of concealing the true nature and ownership of the taxable income and/or assets.

MISUSE OF TRUSTS – There are legitimate uses of trusts in tax and estate planning, but the IRS commonly sees highly questionable transactions. Trusts also commonly show up in abusive tax structures. Promoters often urge taxpayers to transfer large amounts of assets into trusts. These assets include not only cash and investments, but also successful on-going businesses. These transactions promise reduced taxable income, inflated deductions for personal expenses, the reduction or elimination of self-employment taxes and reduced estate or gift transfer taxes.

IRS has identified an increase in the improper use of certain private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a competent professional before entering a trust arrangement.

More information on tax scams is available at IRS.gov.