WASHINGTON - The Internal Revenue Service
today identified 12 of the most blatant scams affecting
American taxpayers and warned people not to fall for
schemes peddled by scamsters.
This year the "Dirty Dozen" highlights five new scams
that IRS auditors and criminal investigators have
uncovered. Topping off the list are fraudulent refunds
being claimed in connection with the special Telephone
Excise Tax Refund available to most taxpayers this
filing season. The IRS is actively investigating
instances of this scam involving tax preparers who are
preparing inflated refund requests.
Also new to the Dirty Dozen this year are abuses
pertaining to Roth IRAs, the American Indian Employment
Credit, domestic shell corporations and structured
"Taxpayers shouldn't let their guard down," IRS
Commissioner Mark W. Everson said. "Don't get taken by
scam artists making outrageous promises. If you use a
tax professional, pick someone who is reputable.
Taxpayers should remember they are ultimately
responsible for what is on their tax return even if some
unscrupulous preparers have steered them in the wrong
Involvement in tax schemes leads to problems for scam
artists and taxpayers. Tax return preparers and
promoters risk significant penalties, interest and
possible criminal prosecution.
The IRS urges taxpayers to avoid these common schemes:
1. Telephone Excise Tax Refund Abuses: Early filings
show some individual taxpayers have requested large and
apparently improper amounts for the special telephone
tax refund. In some cases, taxpayers appear to be
requesting a refund of the entire amount of their phone
bills, rather than just the three-percent tax on
long-distance and bundled service to which they are
entitled. Some tax preparers are helping their clients
file apparently improper requests. The IRS is
investigating potential abuses in this area and will
take prompt action against taxpayers who claim improper
refund amounts and against the return preparers who help
2. Abusive Roth IRAs: Taxpayers should be wary of
advisers who encourage them to shift under-valued
property to Roth Individual Retirement Arrangements
(IRAs). In one variation, a promoter has the taxpayer
move under-valued common stock into a Roth IRA,
circumventing the annual maximum contribution limit and
allowing otherwise taxable income to go untaxed.
3. Phishing is a technique used by identity thieves to
acquire personal financial data in order to gain access
to the financial accounts of unsuspecting consumers, run
up charges on their credit cards or apply for loans in
their names. These Internet-based criminals pose as
representatives of a financial institution - or
sometimes the IRS itself - and send out fictitious
e-mail correspondence in an attempt to trick consumers
into disclosing private information. A typical e-mail
notifies a taxpayer of an outstanding refund and urges
the taxpayer to click on a hyperlink and visit an
official-looking Web site. The Web site then solicits a
social security and credit card number. It is important
to note the IRS does not use e-mail to initiate contact
with taxpayers about issues related to their accounts.
If a taxpayer has any doubt whether a contact from the
IRS is authentic, the taxpayer should call
1-800-829-1040 to confirm it.
4. Disguised Corporate Ownership: Domestic shell
corporations and other entities are being formed and
operated in certain states for the purpose of disguising
the ownership of the business or financial activity.
Once formed, these anonymous entities can be, and are
being, used to facilitate underreporting of income,
non-filing of tax returns, listed transactions, money
laundering, financial crimes and possibly terrorist
financing. The IRS is working with state authorities to
identify these entities and to bring their owners into
5. Zero Wages: In this scam, which first appeared in the
Dirty Dozen in 2006, a Form 4852 (Substitute Form W-2)
or a "corrected" Form 1099 showing zero or little income
is submitted with a federal tax return. The taxpayer may
include a statement rebutting wages and taxes reported
by the payer to the IRS. An explanation on the Form 4852
may cite statutory language behind Internal Revenue Code
sections 3401 and 3121 or may include some reference to
the paying company refusing to issue a corrected Form
W-2 for fear of IRS retaliation.
6. Return Preparer Fraud: Dishonest return preparers can
cause many headaches for taxpayers who fall victim to
their schemes. Such preparers make their money by
skimming a portion of their clients' refunds and
charging inflated fees for return preparation services.
They attract new clients by promising large refunds.
Some preparers promote filing fraudulent claims for
refunds on items such as fuel tax credits to recover
taxes paid in prior years. Taxpayers should choose
carefully when hiring a tax preparer. As the old saying
goes, "If it sounds too good to be true, it probably
is." Remember that no matter who prepares the return,
the taxpayer is ultimately responsible for its accuracy.
Since 2002, the courts have issued injunctions ordering
dozens of individuals to cease preparing returns, and
the Department of Justice has filed complaints against
dozens of others. During fiscal year 2006, 109 tax
return preparers were convicted of tax crimes and
sentenced to an average of 18 months in prison.
7. American Indian Employment Credit: Taxpayers submit
returns and claims reducing taxable income by
substantial amounts citing an American Indian employment
or treaty credit. Although there is an Indian Employment
Credit available for businesses that employ Native
Americans or their spouses, there is no provision for
its use by employees. In a somewhat similar scam,
unscrupulous promoters have informed Native Americans
that they are not subject to federal income taxation.
The promoters solicit individual Indians to file Form
W-8 BEN seeking relief from all withholding of federal
taxation. A recent "phishing" variation has promoters
using false IRS letterheads to solicit personal
financial information that they claim the IRS needs in
order to process their "non-tax" status.
8. Trust Misuse: For years unscrupulous promoters have
urged taxpayers to transfer assets into trusts. They
promise reduction of income subject to tax, deductions
for personal expenses and reduced estate or gift taxes.
However, some trusts do not deliver the promised tax
benefits. There are currently more than 150 active
abusive trust investigations underway and 49 injunctions
have been obtained against promoters since 2001. As with
other arrangements, taxpayers should seek the advice of
a trusted professional before entering into a trust.
9. Structured Entity Credits: Promoters of this newly
identified scheme are setting up partnerships to own and
sell state conservation easement credits, federal
rehabilitation credits and other credits. The purported
credits are the only assets owned by the partnership and
once the credits are fully used, an investor receives a
K-1 indicating the initial investment is a total loss,
which is then deducted on the investor's individual tax
return. Forming such an entity is not a viable business
purpose. In other words, the investments are not valid,
and the losses are not deductible.
10. Abuse of Charitable Organizations and Deductions:
The IRS continues to observe the use of tax-exempt
organizations to improperly shield income or assets from
taxation. This can occur when a taxpayer moves assets or
income to a tax-exempt supporting organization or
donor-advised fund but maintains control over the assets
or income. Contributions of non-cash assets continue to
be an area of abuse, especially with regard to
overvaluation of contributed property. In addition, the
IRS is noticing the return of private tuition payments
being disguised as charitable contributions to religious
11. Form 843 Tax Abatement: This scam rests on faulty
interpretation of the Internal Revenue Code. It involves
the filer requesting abatement of previously assessed
tax using Form 843. Many using this scam have not
previously filed tax returns and the tax they are trying
to have abated has been assessed by the IRS through the
Substitute for Return Program. The filer uses the Form
843 to list reasons for the request. Often, one of the
reasons is: "Failed to properly compute and/or calculate
IRC Sec 83-Property Transferred in Connection with
Performance of Service."
12. Frivolous Arguments: Promoters have been known to
make the following outlandish claims: the Sixteenth
Amendment concerning congressional power to lay and
collect income taxes was never ratified; wages are not
income; filing a return and paying taxes are merely
voluntary; and being required to file Form 1040 violates
the Fifth Amendment right against self-incrimination or
the Fourth Amendment right to privacy. Don't believe
these or other similar claims. These arguments are false
and have been thrown out of court. While taxpayers have
the right to contest their tax liabilities in court, no
one has the right to disobey the law.
IRS Still Watches Scams That Fall Off the List
Five of last year's Dirty Dozen tax scams rotated off
the list for 2007. While the IRS has seen a decline in
the occurrence of some of these scams - abusive credit
counseling agencies, for example - other problems, such
as offshore abusive transactions continue to be an area
of particular concern for the agency. The absence of a
particular scheme from the Dirty Dozen should not be
taken as an indication that the IRS is unaware of it or
not taking steps to counter it.
How to Report Suspected Tax Fraud Activity
Suspected tax fraud can be reported to the IRS using IRS
Form 3949-A, Information Referral. Form 3949-A is
available for download from the IRS Web site at IRS.gov,
or by mail by calling 1-800-829-3676. The completed form
or a letter detailing the alleged fraudulent activity
should be addressed to the Internal Revenue Service,
Fresno, CA 93888. The mailing should include specific
information about who is being reported, the activity
being reported, how the activity became known, when the
alleged violation took place, the amount of money
involved and any other information that might be helpful
in an investigation. The person filing the report is not
required to self-identify, although it is helpful to do
so. The identity of the person filing the report can be
kept confidential. The person may also be entitled to a
About the ICFE:
The Institute of Consumer Financial Education (ICFE) was founded in 1982 by the late Loren Dunton (creator of the Certified Financial Planner (CFP) designation). The ICFE is dedicated to helping consumers of all ages to improve their spending, increase savings and use credit more wisely.
The ICFE is an award winning, nonprofit, consumer education organization that has helped millions of people through its education programs and Resources. It publishes the Do-It-Yourself Credit File correction Guide, which is updated annually. The ICFE has distributed over one million Credit/Debit Card Warning Labels and Credit/Debit Card Sleeves world wide.
The ICFE became an official partner with the Department of Defense/Financial Readiness Campaign in June of 2004.The ICFE was an active partner in the California Student Debt Resource Awareness Project (CASDRAP) which resulted in a new web site: (studentdebthelp.org). CASDRAP disbanded in 2010, shortly after the web site project was completed. In 2011 the ICFE assumed the single sponsorship of the (studentdebthelp.org) web site and is now responsible for its content and operation.
The ICFE is also an on-line help for consumers who spend too much. ICFE's spending help was featured in PARADE Magazine in the Intelligence Report section. The money helps and tips are from the ICFE's Money Instruction Book, our course in personal finance.
Visit the ICFE's other web sites at: www.financial-education-icfe.org and studentdebthelp.org. Both sites helps consumers and students with mending spending, learning about the proper use of credit, budget and expense guidelines, how to set up and implement a spending-plan and also how to access financial education courses and how to teach children about money. Other ICFE services include: Ask Mr. G, a free eNews, and an online resource center for students, parents and educators, plus financial education learning tools and a book store.