IRS UPDATES THE 'DIRTY DOZEN' FOR
2003: AGENCY WARNS OF 12 COMMON SCAMS
"With the tax season in full
swing, we're seeing the traditional upswing in tax trickery," said IRS Acting
Commissioner Bob Wenzel. "Year after year, con artists across the nation try pulling
a fast one on honest taxpayers with different types of miracle tax solutions. Don't be fooled by the 'Dirty Dozen' and other
misleading scams. There is no secret way to get out of paying taxes."
The IRS and other federal agencies are
aggressively pursuing and successfully prosecuting promoters of these schemes and many of
their clients for fraud and tax evasion. These can result in imprisonment, fines and
repayment of taxes owed with interest and penalties. Even innocent taxpayers involved in
these schemes can face a staggering amount of back interest and penalties.
Taxpayers who suspect tax fraud can
report it to the IRS at 1-800-829-0433. More information on tax scams and schemes is
available by visiting "The Newsroom" section of IRS.gov.
The IRS urges people to avoid these
common schemes:
1. OFFSHORE TRANSACTIONS. Some people
use offshore transactions to avoid paying
Through April 15, the IRS is offering
people with improper offshore financial arrangements a chance to make things right.
Eligible taxpayers who step forward will not face civil fraud and information return
penalties. A taxpayer involved in these schemes who does not come forward now, however,
will be subject to payment of taxes, interest, penalties and potential criminal
prosecution.
People interested in participating in
the program, called the Offshore Voluntary Compliance Initiative, can contact the IRS by
calling 215-516-3537 (not toll-free).
2. IDENTITY THEFT. Identity thieves
use someone's personal data to steal his or her financial accounts, run up charges on the
victim's existing credit cards, apply for new loans, credit cards, services or benefits in
the victim's name and even file fraudulent tax returns.
The IRS is aware of at least two
recent identity theft scams involving taxes or the IRS. In one, tax preparers
allegedly used information, such as Social Security numbers and financial information,
from their clients' tax returns to commit identity theft. In another, fraudsters sent bank
customers fictitious bank correspondence and IRS forms in an attempt to trick them into
disclosing their personal and banking data.
For taxpayers, it pays to be choosy
about disclosing personal and financial information. And the IRS encourages taxpayers to
carefully select a reputable tax professional.
3. PHONY TAX PAYMENT CHECKS. In this
scheme, con artists sell fictitious financial instruments that look like checks to pay a
tax liability, mortgage and other debts. The con artists may also counsel their clients to
use a phony check to overpay their taxes so they can receive a refund from the IRS for the
overpayment. The false checks, called sight drafts, are worthless and have no financial
value. It is illegal to use these sight drafts to pay a tax liability or other debts.
4. AFRICAN-AMERICANS GET A SPECIAL TAX
REFUND. Thousands of African-Americans have been misled by people offering to file for tax
credits or refunds related to reparations for slavery. There is no such provision in the
tax law. Some unscrupulous promoters have encouraged clients to pay them to prepare a
claim for this refund. But the claims are a waste of money. Promoters of reparations tax
schemes have been convicted and imprisoned. And taxpayers could face a $500 penalty for
filing such claims if they do not withdraw the claim.
In early 2002, the slavery reparations
scam ranked as the No. 1 scheme on the Dirty Dozen list. Following a sweeping public
outreach campaign and assistance from members of the Congressional Black Caucus and other
organizations, the number of reparation scam claims fell sharply. Tens of thousands of
claims were received in 2001, but the claims fell to less than 50 per week in 2002.
5. NO TAXES WITHHELD FROM WAGES.
Illegal schemes are being promoted that instruct employers not to withhold federal income
tax or employment taxes from wages paid to their employees. These schemes are based on an
incorrect interpretation of tax law and have been refuted in court. A recent flurry of
court actions has been taken against promoters of these schemes. Taxpayers who have
concerns about their employer and employment taxes can get help by calling the IRS at
1-800-829-1040.
6. IMPROPER HOME-BASED BUSINESS. This
scheme purports to offer tax "relief" but in reality is illegal tax avoidance.
The promoters of this scheme claim that individual taxpayers can deduct most, or all, of
their personal expenses as business expenses by setting up a bogus home-based business.
But the tax code firmly establishes that a clear business purpose and profit motive must
exist in order to generate and claim allowable business expenses.
7. PAY THE TAX, THEN
GET THE PRIZE. The caller says you've won a prize, and all you have to do to get it is to
pay the income tax due. Don't believe it. Someone who really wins a prize may need to make
an estimated tax payment to cover the taxes that will be due at the end of the year. But
the payment goes to the IRS - not the caller. Whether the prize is cash, a car or a trip,
a legitimate prize giver generally sends both the winner and the IRS a Form 1099 showing
the total prize value that should be reported on the winner's tax return.
8. FRIVOLOUS ARGUMENTS. Frivolous
arguments are false arguments that are unsupported by law.
When a scheme promoter says "I don't pay taxes - why should you"
or urges you to "untax yourself for $49.95," beware.
These scams are as old as snake oil, but people continue to be taken in. And now they're
on the Internet. The ads may say that paying taxes is "voluntary," but that's
just plain wrong. The
9. SOCIAL SECURITY TAX SCHEME.
Taxpayers shouldn't fall victim to a scam offering refunds of the Social Security taxes
they have paid during their lifetimes. The scam works by the victim paying a
"paperwork" fee of $100, plus a percentage of any refund received, to file a
refund claim with the IRS. This hoax fleeces the victims for the up-front fee. The law
does not allow such a refund of Social Security taxes paid. The IRS processing centers are
alert to this hoax and have been stopping the false claims.
10. "I CAN GET YOU A BIG REFUND
... FOR A FEE!" Refund scheme operators may approach someone wanting to
"borrow" their Social Security number or give him or her a
phony W-2 so it appears that the person qualifies for a big refund. They may promise to
split the refund with that person, but the IRS catches most of these false refund claims
before they go out. And when one does go out, the participant usually ends up paying back
the refund along with stiff penalties and interest. Two lessons to remember: 1) Anyone who
promises someone a bigger refund without knowing their tax situation could be misleading
them, and 2) Never sign a tax return without looking it over to make sure it's honest and
correct.
11. SHARE/BORROW EITC DEPENDENTS.
Unscrupulous tax preparers "share" one client's
qualifying children with another client in order to allow both clients to claim the Earned
Income Tax Credit. For example, one client may have four children but only needs to list
two to get the maximum EITC. The preparer will list two
children on the first client's return and the other two on another client's tax return.
The preparer and the client "selling" the dependents
split a fee. The IRS prosecutes the preparers of such
fraudulent claims, and participating taxpayers could be subject to civil penalties.
12. IRS "AGENT" COMES TO
YOUR HOUSE TO COLLECT. First, do not let anyone into your home unless they identify
themselves to your satisfaction. IRS special agents, field auditors and collection
officers carry picture IDs and will normally try to contact you before they visit. If you
think the person on your doorstep is an impostor, lock your door and call the local
police. To report IRS impostors, call the Treasury Inspector General's Hotline at
1-800-366-4484.
Beyond the "Dirty Dozen,"
the IRS sees many more tax schemes. Some examples include home-based business scams,
disabled access credit for pay phones and a variety of improper abusive trusts.
"The best advice for taxpayers is
to remember the concept of 'buyer beware,'" Wenzel said.
"Think carefully before paying for services or signing important documents. And don't
be fooled by outrageous promises. If something sounds too good to be true, it probably
is."