In our last post, we covered four schemes aimed at taking advantage of well-meaning taxpayers. The next four items on the IRS Dirty Dozen for this year involve illegal actions taken by taxpayers to either reduce their taxable income, or to claim deductions or credits to which they are not entitled.
Don’t engage in tax avoidance or evasion schemes
The IRS warns taxpayers to note that get-rich-quick and tax avoidance schemes may not only trigger an audit, if you knowingly participate in one you face hefty fines and may also be criminally prosecuted. Here are schemes involving illegal reductions of taxable income and claims for deductions and credits that made it to this year’s Dirty Dozen:
- Falsely padding deductions and inflating expenses such as charitable contributions and business expenses, and/or claiming credits that you are not entitled to receive, such as the Earned Income Tax Credit or the Child Tax Credit.
- Improper claims for business credits, particularly claims for research credits (which are limited to businesses that engage in certain qualified research activities) and fuel tax credits (generally restricted to off-highway business or farming). Note that claiming undeserved business credits is a common scam and the IRS is warning taxpayers to beware of unscrupulous tax preparers who encourage you to utilize them.
- Falsified income, fake Forms 1099 is on the list this year due to number of taxpayers who falsely inflate their wage or self-employment income in order to secure larger refundable tax credits such as the Earned Income Tax Credit. The IRS also warns taxpayers to be wary of tax preparers who encourage them to engage in schemes that involve filing false financial instruments from banks, loan servicers and mortgage companies, or using Form 56 to claim false fiduciary responsibilities.
- Falsely inflated refunds is a form of tax fraud where taxpayers attempt to claim tax refunds by falsely claiming no taxable income or by submitting statements to the government that rebut wages and taxes reported by third parties to the IRS. They also make claims for undeserved tax benefits and credits (e.g., Earned Income Tax Credit and/or education credits), or claim fictitious tax rebates (such as using 1099-OID forms to claim funds from “secret government accounts” which do not exist), among other things.
Note that many tax scammers pretend to be tax preparers, filing false returns in their clients’ names so that they can claim their tax refunds for themselves. They typically target low-income taxpayers who do not have to file tax returns, or otherwise lure people with the promise of a large tax refund. As a result, many taxpayers end up paying significant tax penalties and losing important government benefits, including veterans benefits and low-income housing, because they have filed tax statements with the wrong income amounts. We will cover tax return preparer fraud in greater depth in Part IV.
In Part III, we will cover abusive tax shelters and offshore tax schemes.