2011 Dirty Dozen

Jul 30, 2011

The annual IRS list of the most notorious tax scams, the "Dirty Dozen," has been released. (See IRS News Release IR-2011-39 .) "The Dirty Dozen represents the worst of the worst tax scams," IRS Commissioner Doug Shulman said. "Don't fall prey to these tax scams. They may look tempting, but these fraudulent deals end up hurting people who participate in them."

2011 Dirty Dozen

Without further ado, the following dastardly deeds make-up the IRS's 2011 dirty dozen:

1. Hiding Income Offshore . Individuals continue to try to avoid paying U.S. taxes by illegally hiding income in off-shore bank and brokerage accounts or using offshore debit cards, credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities, or insurance plans. The IRS, state, and U.S. possession tax agencies aggressively pursue taxpayers and promoters of these scams. In early February, the IRS announced a second voluntary disclosure initiative available through 8/31/11 designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes.

2. Identity Theft and Phishing. Identity theft occurs when someone uses an unsuspecting individual's name, Social Security number, credit card number, or other personal information without permission to commit fraud or other crimes, such as using someone else's personal information to file a fraudulent tax return and collect a refund. Phishing is a tactic used by scam artists to trick unsuspecting victims into revealing personal or financial information, usually by promising a tax refund if the victim provides this information. IRS impersonation schemes can take the form of emails, tweets, or phony websites.

Note: Warn clients not to open any attachments or click on any links in suspicious emails claiming to be from the IRS. Also, the IRS requests that suspicious emails and Web addresses that do not begin with http://www.irs.gov be forwarded to the IRS mailbox: phishing@irs.gov . Clients who believe their personal information has been stolen and used for tax purposes should immediately contact the IRS Identity Protection Specialized Unit at 1-800-908-4490.

3. Return Preparer Fraud. Dishonest preparers cause many problems for taxpayers falling victim to their schemes. Such preparers derive financial gain by skimming a portion of their clients' refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. The IRS is implementing a number of steps for future filing seasons aimed at thwarting such dishonest deeds. These include requiring all paid tax return preparers to register with the IRS and obtain a Preparer Tax Identification Number (PTIN), as well as both competency tests and ongoing continuing professional education for any paid tax return preparer who isn't an attorney, CPA, or enrolled agent.

4. Filing False or Misleading Forms. This tactic is used by scam artists who file false or misleading returns to claim refunds they are not entitled to receive. Frivolous information returns, such as Form 1099-OID (Original Issue Discount), claiming false withholding credits are used to legitimize erroneous refund claims.

5. Frivolous Arguments. Frivolous scheme promoters encourage people to make unreasonable and unfounded claims to avoid paying taxes. The IRS has a list of frivolous legal positions that taxpayers should avoid (search for "The Truth About Frivolous Tax Arguments" on www.irs.gov .)

6. Reporting Nontaxable Social Security Benefits with Excessive Withholding. The IRS is finding returns where taxpayers report nontaxable social security benefits with excessive withholding. This tactic increases withholding but not taxable income, thus inflating the taxpayer's refund. Often both the withholding amount and the reported income are incorrect. The IRS warns that this indiscretion can result in a $5,000 penalty.

7. Abuse of Charitable Organizations and Deductions. Misuses of tax-exempt organizations 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. Often, the donations are highly overvalued or the organization receiving the donation promises that the donor can purchase the items back at a later date at a price the donor sets.

8. Abusive Retirement Plans . The IRS continues to uncover abuses in retirement plan arrangements, including Roth IRAs. It is looking for transactions that taxpayers use to avoid the limits on IRA contributions (such as, shifting appreciated assets into IRAs or companies owned by their IRAs at less than fair market value), as well as transactions that are not properly reported as early distributions.

9. Disguised Corporate Ownership . Domestic shell corporations and other entities are formed and operated in certain states to disguise ownership of a business or financial activity. Such entities can be used to under-report income, claim fictitious deductions, avoid the filing of tax returns, or participate in listed transactions, money laundering, financial crimes, and even terrorist financing. The IRS is working with state authorities to identify these entities and bring their owners into compliance.

10. Zero Wages. Filing a phony wage-related 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. Typically, a Form 4852 (Substitute Form W-2) or a "corrected" Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS. The IRS warns that this scheme can result in a $5,000 penalty.

11. Misuse of Trusts . Unscrupulous promoters have urged taxpayers to transfer assets into trusts, promising reduction of income subject to tax, deductions for personal expenses, and reduced estate or gift taxes. However, some trusts don't deliver as promised. The IRS has recently seen an increase in the improper use of private annuity trusts and foreign trusts to divert income and deduct personal expenses.

12 . Fuel Tax Credit Scams. The IRS is receiving unreasonable claims for the fuel tax credit. Some taxpayers, such as farmers who use fuel for off-road business purposes, may be eligible for the credit. But, others are claiming the credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the credit can result in a $5,000 penalty.


Tax professionals should counsel taxpayers to steer clear of these schemes and take steps to remedy the situation for any client involved in one. Suspected tax fraud can be confidentially reported to the IRS using Form 3949-A (Information Referral) available at www.irs.gov.

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