IRS Unveils 2008 List of Notorious Tax Scams — The 'Dirty Dozen'

The IRS has unveiled its latest list of notorious tax scams, which it calls the "Dirty Dozen," highlighted by Internet phishing scams and several frivolous tax arguments.

May 22, 2008
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The IRS has unveiled its latest list of notorious tax scams, which it calls the "Dirty Dozen," highlighted by Internet phishing scams and several frivolous tax arguments. New to the "Dirty Dozen" this year is a scheme, which the IRS auditors discovered, that relates to unreasonable and/or excessive fuel tax credit claims.

Observation. Practitioners should counsel clients and prospective clients to steer clear of these schemes and take steps to remedy the situation for any client that may have gotten involved in one of them.

  • Phishing. This is a tactic used by internet-based thieves to trick unsuspecting victims into revealing personal information they can then use to access the victims’ financial accounts. Phishing scams often take the form of an e-mail that appears to come from a legitimate source. The IRS never uses e-mail to contact taxpayers about their tax issues.
  • Economic stimulus payment scams. Some scam artists are trying to trick individuals into revealing personal financial information that can be used to access their financial accounts by making promises relating to the economic stimulus payment, often called a "rebate." To obtain the payment, eligible individuals in most cases will not have to do anything more than file a 2007 federal tax return. But some criminals posing as IRS representatives are trying to trick taxpayers into revealing their personal financial information by falsely telling them they must provide information to get a payment.
  • Frivolous arguments. Promoters of frivolous schemes encourage people to make unreasonable and unfounded claims to avoid paying the taxes they owe. Most recently, the IRS expanded its list of frivolous legal positions that taxpayers should stay away from. Taxpayers who file a tax return or make a submission based on one of the positions on the list are subject to a $5,000 penalty.
  • Fuel tax credit scams. The IRS is receiving claims for the fuel tax credit that are unreasonable. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit, but some individuals 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 was recently added to the list of frivolous tax claims, potentially subjecting those who improperly claim the credit to a $5,000 penalty.
  • Hiding income offshore. Individuals continue to try to avoid paying U.S. taxes by illegally hiding income in offshore bank and brokerage accounts or using offshore debit cards, credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance plans. The IRS and the tax agencies of U.S. states and possessions continue to aggressively pursue taxpayers and promoters involved in such abusive transactions.
  • Abusive retirement plans. The IRS continues to uncover abuses in retirement plan arrangements, including Roth IRAs. The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to Roth IRAs.
  • 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.
  • False claims for refund and requests for abatement. This scam involves a request for abatement of previously assessed tax using Form 843: "Claim for Refund and Request for Abatement."
  • Return preparer fraud. Dishonest tax return preparers can cause many problems for taxpayers who fall victim to their schemes.
  • Disguised corporate ownership. Some people are going as far as forming domestic shell corporations in certain states for the purpose of disguising the ownership of a business or financial activity. The IRS is working with state authorities to identify these entities and bring their owners into compliance.
  • Misuse of trusts. For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. They promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. However, some trusts do not deliver the promised tax benefits.
  • Abuse of charitable organizations and deductions. The IRS continues to observe the misuses of tax-exempt organizations. These include arrangements to improperly shield income or assets from taxation, attempts by donors to maintain control over donated assets or income from donated property and overvaluation of contributed property. In addition, the IRS is seeing an upturn in instances where taxpayers try to disguise private tuition payments as contributions to charitable or religious organizations.

— From the Gear Up Gold Rush Newsletter from Thomson Tax & Accounting, May 2008. To subscribe to this informative monthly newsletter, visit trainingcpe.thomson.com or click here.