Dirty Dozen Tax Scams for 2012

With tax season upon us, the IRS reminds taxpayers to use caution to protect themselves against schemes ranging from identity theft to return preparer fraud that peak during tax season. I'll be touching on some of these items in more detail on future posts.  My immediate advise is to file your tax return early and use a reputable tax professional--a CPA, or a well known company like Jackson Hewitt or H&R Block. If you have any doubts or questions about tax returns you filed in the past, it's strongly recommended you seek a second professional opinion to review those returns. No one likes to receive a letter from IRS in the future stating they owe significant monies and penalities.

Dirty Dozen tax scams for 2012 are:

1.  Identity theft, where thieves try to use a legitimate taxpayer's identity and personal information to file a tax return and claim a fraudulent refund. For more information, visit the special identity theft page at www.IRS.gov/identitytheft.
2.  Phishing, where an unsolicited email or a fake website that poses as a legitimate site tries to get valuable personal and financial information. The IRS does not contact taxpayers by email to request personal or financial information. Unsolicited emails that appear to be from the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System, should be reported to phishing@irs.gov.
3. Fraudulent tax preparers profit off of the 60 percent of U.S. taxpayers who enlist tax professionals to file their tax returns. Fraudsters take a percentage of their clients' refunds and charge exorbitant rates. Hold your tax preparer accountable by entering his or her Preparer Tax Identification Number on your returns. Refer to the IRS's Tips For Choosing A Tax Preparer before entrusting someone with your most confidential information.
4. Hiding income offshore.
5. “Free money” from the IRS & tax scams involving Social Security, where scammers claim taxpayer can file a tax return with little or no documentation or when scammers promise nonexistent Social Security refunds or rebates.
6. False or inflated income and expenses, which could result in repaying the erroneous refunds, including interest and penalties, and in some cases, prosecution.  For exmaple, some taxpayers lie about income and expenses in order to qualify for tax breaks such as the Earned Income Tax Credit.
7. Falsyfing Form 1099 refund claims, where the perpetrator files a fake information tax return to justify a false refund claim on a tax return.
8. Some taxpayers pick fights with the IRS in order to get out of paying certain taxes. Check out this list of frivolous tax arguments that have been deemed false and have been "thrown out in court."
9.  Falsely claiming zero wages.
10.  Abuse of charities and deductions, including arrangements that improperly shield income or assets from taxation and attempts by donors to control donated assets or income from donated property.
11. Disguised corporate ownership.
12. Misuse of trusts, where highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes.

Tax Audits on the Rise

In the olden days, you were likely to meet with the tax man for an audit by the IRS. These days with budget cuts, you're now almost four times as likely to conduct your tax audit by mail. Of the more than 1.6 million Americans who were slapped with audits last year, 78% dealt with correspondence audits, while only 22% were asked to come in for an in-person examination.

That is a 13% rise in audits-by-mail from 2009, and a 93% jump compared to 2003. In 2000, the chances of getting a correspondence audit were less than 2 to 1.

When people think of audits, they think of being in an office and going to war with someone from the IRS," said Thomas Cooke, a professor of accounting and business law at Georgetown University. "Years ago you could almost guarantee you would have to go in and see someone to do it, but this isn't the case anymore."
Why the shift? Because correspondence audits are cheaper for the IRS. Plus, Cooke said many people take action as soon as they get the audit notice in the mail, in hopes that it won't escalate to a visit from Uncle Sam.

"People are scared to death when they get these letters, so they do everything they can to resolve the problem right away to make it not go further," he said.

While a face-to-face examination with an IRS agent can involve going through an entire return, correspondence audits usually ask taxpayers to provide information about very specific items on a tax return, like income, expenses or deductions.

"It's an effort to try to cut costs and focus their efforts, and there are pluses and minuses to it," said Ed Smith, a tax partner at BDO. "A plus would be if there are only one or two items the IRS is interested in, because they can focus their time and effort on those items and it's more efficient for both parties. On the other hand, depending on the complexity and detail needed to support something, it may be difficult for the taxpayer to respond to a correspondence audit and easier to go over things in person."

Even if the information the IRS is requesting is basic, the complicated jargon often makes it hard for people to understand that the letter they have opened is even an audit.

Out of a sample of 754 taxpayers who claimed the Earned Income Tax Credit and were audited, more than a quarter of them had no idea they were even being audited, the Taxpayer Advocate Service's most recent survey found. Nearly 40% of the same respondents didn't know what information the IRS was asking them to provide.

And that's if they even received the audit in the first place. The IRS rarely checks to make sure letters have been sent to the correct addresses -- and about 10% of overall mail from the IRS is undeliverable, TAS has found.

In addition, 70% of people surveyed by TAS said they prefer not to communicate with the IRS through correspondence audit, and would rather communicate in-person or over the phone.

But the IRS argues that resolving tax-return issues by mail can really benefit both taxpayers and the IRS, saying that mail audits are mainly sent when there are fewer issues with a return and a full in-person audit isn't required.

"In comparison to other audits, correspondence examinations require fewer resources from either the IRS or taxpayers, are considerably less invasive for taxpayers, and effectively contribute to the tax administration objectives of fostering voluntary compliance and reducing the Tax Gap," the IRS stated in response to a recommendation from TAS to conduct fewer mail audits.

And the fact that the IRS is "vastly understaffed" and currently looking at possible budget cuts that would strip the agency of $600 million in funding is only likely to cause mail audits to continue to rise, said Olson.
"I would love to see the IRS go back to doing more field audits -- in most cases, it's less burdensome for taxpayers if they have someone they can talk to," she said. "But the IRS is moving in the opposite direction, and now with proposed budget cuts, there will be greater pressure to use more automation."

It's important to have a dedicated tax preparer when you are audited by the IRS, just like a family doctor who knows you and your medical history.  Going to a professional is the safer route. In my opinion, it's too risky to take shortcuts with your health and IRS.  Invest that money in a good doctor and tax preparer. While I try to support mom-and-pop businesses, often they can't help you with an IRS audit.  It's like having a good lawyer. It's good "to have people".

Let me help you simply your life and finances.
Elizabeth
lizandrade@juno.com