As you prepare to do your taxes this year, it's paramount that you watch out for tax scams that are designed to bilk you out of your hard-earned money, and keep you in trouble with the IRS.
The amount of fraudulent e-mails claiming to come from the IRS or other financial institutions has grown, and the scammers' techniques are improving. In fact, there were more than 37,000 fake websites designed to get your personal information, reports ConsumerReports.org.
The growth of tax-related scams prompted the IRS to publish a list of the most egregious tax scams, and how you can watch out for them.
Phishing. A phishing scam can take the form of a false e-mail that appears to come from a legitimate source, such as a bank or the IRS. The e-mail will trick users into revealing personal information, such as a Social Security number or bank account number so that thieves can access the victim's account. The IRS warns that if you receive an e-mail that claims to be from the IRS, you should forward it to a special electronic mailbox (email@example.com). The IRS never sends e-mails to taxpayers regarding their taxes and the only IRS website is www.irs.gov.
Scams Related to the Economic Stimulus Payment. This is a new scam based that follows the Bush Administration's recent plan to pay individual taxpayers up to $600. Some scammers try to trick individuals into revealing personal financial information that can be used to access their financial accounts by making promises relating to the tax rebate. For example, thieves will tell their victims that they need to reveal a bank account number to receive the rebate. If the target is unwilling then the victims is told that they will not receive the rebate unless the personal information is provided. Don't fall for this: The IRS will not contact taxpayers by phone or e-mail about the tax rebate.
Frivolous Arguments. Perpetrators of these frivolous schemes encourage people to make unreasonable and unfounded claims to avoid paying taxes they owe. Taxpayers who file a tax return or make a submission based on a frivolous claim risk being fined $5,000. Some of the frivolous claims include: misrepresentation regarding military spending; a nonexistent "Mariner's Tax Deduction" related to invalid deductions for meals and the misuse of the fuel tax credit. The complete list of frivolous arguments is on the IRS website.
Fuel Tax Credit Scams. Some taxpayers - such as farmers who use fuel for off-highway business purposes - may be eligible for the fuel tax credit. But some individuals claim the tax credit for non-taxable uses of fuel when their occupation or income level makes the claim unreasonable.
Hiding Income Offshore. Individuals continue to try to avoid paying U.S. taxes by illegally hiding income in offshore bank and brokerage accounts. Or, these taxpayers use offshore debit cards, credit cards, wire transfers, foreign trusts, and employee leasing schemes, private annuities or life insurance plans.
Abusive Retirement Plans. The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to Roth IRAs. Look out for tax advisers who encourage you to move your appreciated assets into Roth IRAs at less than fair market value.
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. Taypayers should resist any temptation to participate in any of the variations of this scheme.
False Claims for Refund and Requests for Abatement. This scam involves a request for abatement - the reduction of a tax assessment - of previously assessed taxes using Form 843. According to the IRS, many individuals who try this have not previously filed tax returns. The tax they're trying to abate has been assessed by the IRS through the Substitute for Return Program.
Return Preparer Fraud. These scam artists make their money by skimming a portion of their clients' refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Taxpayers should be wary of these tax preparers - especially if what they promise sounds too good to be true.
Disguised Corporate Ownership. Some fraudulent taxpayers disguise their ownership of a business or financial activity. This is done in an effort to underreport income, or avoid filing taxes for the year. The IRS is working to identify these entities and bring the owners of these entities to justice.
Misuse of Trusts. Some "misguided" tax preparers will encourage tax payers to funnel their assets into trusts, and promise deductions for personal expenses, and reduced estate or gift taxes. However, some trusts do not deliver the promised tax benefits. Taxpayers should seek the advice of a trusted professional before entering into a trust.
Abuse of Charitable Organizations and Deductions. The IRS continually observes the misuse of tax-exempt organizations. Misuse includes arrangements to improperly shield income or assets from taxation, or disguising private tuition payments as contributions to charitable or religious organizations.