United States: Proceed With Caution: The "Dirty Dozen" Tax Scams For 2017

The Dirty Dozen American film released by MGM in 1967 depicts wartime law breaking, theft and impersonation, but today we are talking about the IRS' "Dirty Dozen Tax Scams for 2017" list, which depicts law breaking, theft and impersonation issues that are putting taxpayers at risk.

Every year the IRS releases what it determines are the 12 worst tax scams of the year, affectionately known as the "Dirty Dozen." Once again and not surprisingly, phishing, phone scams and identity theft are the top three. These Dirty Dozen scams can be encountered at any time during year, but they peak during tax season. Unfortunately, an increasing number of people fall prey to these scams. Don't be one of them. If it sounds too good to be true, it probably is.

How the 2017 List Compares to the 2016 List

The same items that appeared on the 2016 list also appear on the 2017 list, albeit in a different order, meaning that some items have increased in terms of risk, exposure and occurrence. For example, phishing schemes moved from third place last year to first due to the massive increase in reports over the last year. It is estimated that 156 million phishing emails are issued every day. Conversely, identity theft dropped from the top spot to third this year, likely due to the enhanced awareness campaigns, as well as the various safeguards the IRS has established over the last year.

In another shift, and a major one at that, hiding money offshore moves down from fifth place to the final spot. Largely due to the IRS Offshore Voluntary Disclosure Program and recent string of successful governmental enforcement actions, an increasing number of taxpayers are aware of the inherent risks of hiding money offshore, and many have come forward to become compliant with their tax reporting responsibilities.

The 2016 vs. 2017 Dirty Dozen Comparison

2016 2017
1. Identity Theft 1. Phishing
2. Phone Scams 2. Phone Scams
3. Phishing 3. Identity Theft
4. Tax Return Preparer Fraud 4. Tax Return Preparer Fraud
5. Offshore Tax Avoidance 5. Fake Charities
6. Inflated Refund Claims 6. Inflated Refund Claims
7. Fake Charities 7. Excessive Claims for Business Credits
8. Falsely Padding Deductions 8. Falsely Padding Deductions
9. Excessive Claims for Business Credits 9. Falsifying Income to Claim Tax Credits
10. Falsifying Income to Claim Tax Credits 10. Hiding Money or Income Offshore
11. Abusive Tax Shelters 11. Frivolous Tax Arguments
12. Frivolous Tax Arguments 12. Offshore Tax Avoidance


Below are brief descriptions of each scam, along with some tips to avoid becoming a victim.

Phishing Schemes

Leading the Dirty Dozen list this year is phishing schemes, which are fake emails and/or websites seeking to illegally obtain personal information. Criminals pose as a trusted person or organization. They use hacking technology to create an email account to send mass emails using another person's name under the guise of a recognizable and trusted company, such as a person's bank, software brand, payroll departments, human resources departments, IRS and other government agencies and even a tax preparer.

These cyber criminals go to great lengths to create websites that appear legitimate but contain fake links, log-in pages and attachments. Their hope is that victims will take the bait and provide money, passwords, Social Security numbers, credit card numbers and other information that will lead to identity theft, which, ironically, was number one on the 2016 Dirty Dozen list.

These scams can also infect a recipient's computer with malware, enabling the criminals to steal personal data directly from the computer.

Phone Scams

There seems to be new phone scams weekly, although the most prevalent phone scams are from those callers representing themselves as IRS agents informing the recipient of a big refund available and asking for personal information so the refund can be issued. The IRS never initiates contact with taxpayers by phone, so be wary and never respond to calls from anyone claiming to be from the IRS, even if they seemingly provide a badge number or other identifying information.

In another variation of this scam, the caller demands that the victim pays a bogus tax bill. They con the victim into sending cash, through prepaid debit or gift cards or through wire transfers. They may also leave "urgent" callback requests through phone "robo-calls," or via a phishing email as described above. Many phone scams use threats of imprisonment to intimidate and bully a victim into paying. They may even threaten to arrest, deport or revoke the license of their victim if they don't get the money.

Scammers often alter caller ID numbers, frequently using area code 202 for Washington, D.C., to make it look like the IRS or another federal agency is calling. The callers use IRS titles and fake badge numbers to appear legitimate. They may use the victim's name, address and other personal information to make the call sound legitimate.

This past January, the Treasury Inspector General for Tax Administration (TIGTA) announced they have received reports of over 900,000 phone scam contacts since October 2013 and have become aware of over 10,000 victims who have collectively paid more than $54 million as a result of the scam.

These scams continue to grow in reach, approach and audacity, and the calls are increasing at a frightening level. We receive calls each week, sometimes daily, from clients receiving these types of calls. It's an epidemic.

Reminder of the five things the IRS will never do:

  • The IRS will never call to demand immediate payment, nor will they call about taxes owed without first having mailed you a bill.
  • The IRS will never demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
  • The IRS will never require you to use a specific payment method for your taxes, such as a prepaid debit card.
  • The IRS will never ask for credit or debit card numbers over the phone.
  • The IRS will never threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.

Tax-Related Identity Theft

Remaining a top item on the list, with its related scams to steal personal and financial data from taxpayers or data held by tax professionals, is tax-related identity theft. Although progress has been made in this area, it remains an ongoing threat. We have been writing about tax-related identity theft and scams and ways to stay protected for years. See one example here.

Security reminders for taxpayers:

  • Always use anti-virus software with a strong firewall and current security settings. Encrypt files containing sensitive information, use strong passwords and change them often.
  • Avoid phishing emails and don't click on unfamiliar links or download attachments, even if they appear to be coming from someone you know or even a trusted organization.
  • Secure your personal data, shred documents with personal data that are no longer needed and secure your tax records.

Tax Return Preparer Fraud

This fraud takes a different form in that crooked preparers promise outlandish refunds then steal from their client or file fraudulent returns.

Well-intentioned taxpayers can be misled by preparers who do not understand tax law or who mislead the taxpayer into taking credits or deductions they are not entitled to in order to increase their fee.

A few items to consider when choosing a tax return preparer:

  • Inquire if the preparer has an IRS Preparer Tax Identification Number (PTIN). Paid tax return preparers are required to register with the IRS, to have a PTIN and to include it on tax returns.
  • Check for professional credentials such as Certified Public Accountant, enrolled agent or attorney. Such professionals are automatically licensed to practice before the IRS and will have a deep understanding of complex U.S. tax rules and regulations.
  • Check for professional history through state licensing boards.
  • Inquire about fees. Fees based on your refund are not permitted, and if the fee sounds too good to be true, it likely is.
  • Ascertain that your preparer is authorized to e-file your tax returns, as some may not be authorized, yet claim to be.
  • If a preparer asks you to sign a blank return ... RUN!

Beware of Fraudulent and Fake Charities

"Fake charities set up by scam artists to steal your money or personal information are a recurring problem," said IRS Commissioner John Koskinen. "Taxpayers should take the time to research organizations before giving their hard-earned money."

The IRS website has an "Exempt Organizations Select Check" feature, which allows people to find legitimate, qualified charities to which donations may be tax-deductible. Legitimate charities will provide their employer identification number (EIN) if requested.

As a reminder, do not provide personal information, such as Social Security numbers, to anyone soliciting a contribution.

Inflated Refund Claims

While honest tax preparers provide their clients a copy of the tax return, victims of scams frequently are not given a copy of what was filed. Victims also report that the fraudulent refund is deposited into the scammer's bank account. The scammers deduct a large "fee" before paying victims. These entirely illegal practices are not used by legitimate tax preparers.

Scammers will promise (often low-income taxpayers or the elderly) large refunds based on credits or deduction for which the taxpayers is not eligible.

The IRS reminds all taxpayers that they are legally responsible for what is reported on their returns, even if it was prepared by someone else. Taxpayers who are victimized by these or any unscrupulous schemes can end up being penalized for filing false claims or receiving fraudulent refunds. Ignorance of taxpayer responsibility will not be a legitimate defense, even if they claim to have been misled.

Excessive Claims for Business Credits

Once again, fuel tax credit and research tax credit scams are specifically identified by the IRS. Fuel tax credits, which apply to certain off highway use vehicles or farming equipment, and research credits, which apply to select qualified research activities, have limited applicability. Most taxpayers are not eligible.

Falsely Padding Deductions

This scam involves taxpayers or preparers overstating charitable contributions, business expenses and tax credits, such as the Earned Income Tax Credit (EITC) or Child Tax Credit.

Falsifying Income to Claim Refundable Tax Credits

Falsely boosting earned income to maximize the EITC or falsely creating IRS Forms 1099 to create fake debtor relationships.

Abusive Tax Shelters

Captive insurance companies in particular remain on the abusive tax shelter and "transactions of interest" listing. Promotors of such sophisticated shelters insure unlikely risks, fail to meet a real business need, have unsupported underwriting and duplicate existing coverage. Policies may also contain vague or ambiguous terms and may involve multiple pass-through entities and misuse trusts.

Frivolous Tax Arguments

Since the beginning of the income tax code in 1913, frivolous tax arguments on religious or moral grounds have been advanced by outlandish promoters pitching far-flung, unsupportable ideas. The courts have rules against such protestors time after time.

Offshore Tax Avoidance

Since the IRS opened the Offshore Voluntary Disclosure Program in 2009, it has conducted thousands of offshore-related civil audits that resulted in the payment of tens of millions of dollars in unpaid taxes. The IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions, as well as incarceration.

Over the years, numerous individuals have been identified as evading U.S. taxes by attempting to hide income in offshore banks, brokerage accounts or nominee entities. While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting requirements are breaking the law and risk significant fines, as well as the possibility of criminal prosecution.

TAG's Perspective

As we have been cautioning our clients and friends for years now, never respond to an unsolicited email, unsolicited text or unsolicited phone call. That is, if you did not initiate the discussion, whether an email or text or phone, etc., don't proceed. Just delete. No voluntary responses. This simple approach avoids ugly consequences.

If you would like more information about this topic or your own unique situation, please contact any of the practitioners in the Tax Accounting Group. For information about other pertinent tax topics, please visit our publications page located here.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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