The Dirty Dozen — a 1967 war movie starring Lee Marvin, Charles Bronson, and Jim Brown, or a list of the top twelve tax scams as identified by the Internal Revenue Service? How about both?
Each year, the IRS releases a list of the "Dirty Dozen" tax scams to watch out for during tax season. This year's list, shown below, includes classic scams as well as some new twists.
1. Identity Theft – Tax time brings extra activity among thieves looking for Social Security numbers and other personal information that allows them to falsely claim refunds (not to mention running up bills and draining bank accounts). Be very protective of your personal information. If you would like to monitor your credit to prevent identity theft and see your credit reports and scores, check out our credit monitoring service.
2. Phishing – The IRS does not e-mail you or direct you to websites regarding any bill without prior contact. Do not be fooled by e-mails encouraging you to click on links to a site in reference to your tax bill; the website may be a fake, designed to gain your personal information.
3. Phone Scams – Con artists sometimes impersonate IRS agents and threaten arrests, deportation, and other unpleasant outcomes unless a bill is paid immediately over the phone. No matter what horrible things you think about our tax system, the IRS does not do business this way. Never give out your personal information over the phone unless you initiated the call and are sure you are dealing with a real IRS agent.
4. Preparation Fraud – Some tax preparers bend the rules in order to get you the highest refund possible. Unfortunately, once you sign and file the return, you are responsible for any errors. If you choose to have others do your taxes, be sure to use a reputable tax preparer. "The number one thing is finding someone who is honest and has integrity," advises Betterment Head of Tax Eric Bronnenkant. "It's someone whom you're trusting with all of your personal financial information, so that provision shouldn't be taken lightly."
5. Offshore Tax Avoidance – The IRS is cracking down on hiding money offshore to avoid tax payments. If you find yourself in this position, use the Offshore Voluntary Disclosure Program (OVDP) to make things right — or run the risk of severe penalties. Since the program's inception in 2009, the IRS has received more than 56,400 disclosures and collected over $11.1 billion through the OVDP.
6. Inflated Refunds – Anyone who promises you a big refund without looking at your records first should be avoided. If it sounds too good to be true, guess what? It is.
7. Fake Charities – Before making your donation, check the IRS website to make sure that your donation is going to a qualified charitable organization. Look for knockoff organizations with names, websites, and logos that are similar to well-known legitimate organizations.
8. Padded Deductions/Credits – It's really simple — do not claim larger deductions than you can justify through receipts or other paperwork. Similarly, make sure you meet eligibility requirements for any tax credits before attempting to claim them.
9. Excessive Business Credit Claims – The above advice goes for businesses as well. Do not claim credits like the research or fuel tax credit unless your business meets the qualifications for those credits.
10. Falsifying Income for Credits – Scam artists can suggest bending the income rules to qualify for tax credits that target lower-income taxpayers, such as the Earned Income Tax Credit. Do not give in to their claims. Never falsify income on a tax return for any reason, regardless of what anybody tells you.
11. Abusive Tax Shelters – By using complicated but authoritative-sounding language, tax scammers can fool people into thinking tax shelters are legitimate when they are not. Seek independent confirmation and outside advice on any scheme designed to limit or avoid taxes.
12. Frivolous Arguments – The IRS is too busy to waste time listening to your claims of being a sovereign nation and therefore enjoying immunity from taxes, or any similar outlandish claims on tax returns. Frivolous tax returns incur a $5,000 penalty, and failure-to-file penalties can end up being even worse.
Look out for these and other tax scams as you file your taxes this year. Healthy skepticism, relentless guarding of your personal information, and adherence to the rules can save you a lot of trouble as well as money.