Tax Scams to Watch Out For

Last updated on June 27, 2022

The Dirty Dozen Tax Scams for 2013 includes intentional inaccuracies in tax returns, frivolous arguments, disguised corporate ownership, and the misuse of trusts. These methods for reducing a tax liability are illegal and therefore punishable by law. Taxpayers should not engage in illegal means to reduce their tax liability.

Tax Refund Scams: Form 1099

Taxpayers may claim a refund when the IRS owes them, but some taxpayers have been found to file a fake IRS Forms, including Form 1099 Original Issue Discount (OID), when they cannot claim a refund. After filing this form, taxpayers justify a bogus refund claim on a corresponding tax return.

Tax scammers spread false claims regarding the IRS giving tax benefits in order to encourage them to claim false deductions or credits, file inaccurate tax returns to claim huge refunds, or avoid paying their tax liability. Participating in such schemes, even in ignorance, leads to heavy penalties and/or imprisonment.

Tax Scams: Misuse of Trusts

Promoters of illegal schemes that promise to provide tax benefits using the transfer of assets and/or income to trusts have cheated many taxpayers. They promise to reduce a tax liability, use the trust to evade taxes and hide assets from creditors. Hiding income and assets from the IRS is considered as tax evasion, which is punishable under law.

Such schemes may entice taxpayers to use trusts to falsely reduce their tax liability through fake deductions, gift taxes, estate taxes, or claiming a reduction in income. As the IRS finds an increase in the use of private annuity trusts and foreign trusts to shift income and deduct personal expenses, taxpayers must watch out for these methods to stay safe from scammers.

Tax Scams: Over Reporting Income to Claim Benefits

Both under-reporting and over-reporting income on a tax return is illegal, and attracts penalties and/or imprisonment. Over-reporting income to claim benefits, such as an inflated refund and refundable tax credits, including the Earned Income Tax Credit can be damaging. The discovery of this fraud can lead to interest and penalties on the tax credit amount. In some cases, it may even lead to criminal prosecution.