Stay Alert : 4 Common Tax Scams

The US government has lost almost $3 trillion to tax evasion, during the last decade alone. This is a serious and persistent issue that results in accumulated national debt and budget deficits. To make up for the losses, US taxpayers are required to pay extra tax dollars out of their pocket every year. A study by shows that in 2010, on an average, every taxpayer, paid an extra $2,200 to offset the losses attributable to tax scams. These losses occurred not only due to tax evasion, but also due to the ill-tactics of tax planning agencies that resorted to unlawful avenues to help their customers with tax evasion.

Keep your Guard Up

One of the ways to protect yourself from tax scams is being aware of the dubious tax planning tactics deployed by agencies that claim to help you save hundreds of thousands of tax dollars. To help ensure you never find yourself on the wrong side of the law, let’s take a look at four common tax frauds that also found their way to the IRS’ list of tax scams:

1. Identity Theft

Inarguably, one of the most common tax scams, identity theft happens when scammers wrongfully obtain a legitimate taxpayer’s identity to commit fraud. Among other damages, these unscrupulous entities often use the personal information to claim tax refunds. The best way to tackle such cases of fraud and deception is to notify the IRS, by filling out this form, and sending it to their Lead Development Center, enclosing any promotional material received from the scammers.

2. Covert Offshore Accounts

Many illegitimate tax saving agencies suggest clients to create offshore accounts and keep withdrawing funds via wire transfer, credit cards, and debit cards. Maintaining offshore accounts is not illegal, given the condition that both you and your service provider will comply with the reporting requirements. Any deviation can result in heavy penalties followed by a possible criminal prosecution. To avoid the situation, all dues must be cleared with immediate effect, and all incomes and expenses must be disclosed at the time of tax filing.

3. Fake Charities

Be cautious of people or organizations masquerading as charitable institutions soliciting funds from taxpayers for a greater good. Some even go to the extent of claiming to represent the IRS and assure that the money will be used for some social cause. To prevent such instances from happening, you should avoid sharing any personal information with third parties and also making any cash payment. Transactions through card or check are better ways of making any payment, as they are  easily documented.

4. Abusive Tax Shelters

Abusive Tax Shelters are various dubious methods to evade taxes, which violate the Internal Revenue Code (IRC) and related statutes. The characteristics of these schemes involve of Limited Liability Partnerships (LLPs), Limited Liability Companies (LLCs), and International Business Companies (IBCs), offshore credit/debit cards, and other instruments. The schemes often involve multi-layer transactions for the purpose of hiding the type and ownership of the taxable income and/or assets.

The Way Forward

The common tax scams mentioned in this post are part of the list compiled by the IRS every year – “The Dirty Dozen” – after considering the various scams faced by taxpayers during the year. Most of these scams peak during tax filing season as most taxpayers prepare their tax returns at the last moment.  Prevent falling prey to an IRS scam by being alert and be careful about any contact you receive from the IRS. The IRS will send letters via US Postal Service as a first line of contact.