Last week, the Financial Crimes Enforcement Network (FinCEN) announced its first-ever civil penalty against a cryptocurrency exchanger for willful violations of the Bank Secrecy Act (BSA). According to the FinCEN Assessment of Civil Money Penalty (Assessment), California-based Eric Powers failed to register with FinCEN as a money services business (MSB); develop, implement, and maintain an effective written AML program; report suspicious transactions conducted by, at, or through Mr. Powers; and file currency transaction reports – all requirements of the BSA and implementing regulations.

Mr. Powers operated as a peer-to-peer exchanger of the convertible virtual currency bitcoin, meaning he purchased and sold bitcoin to and from other people. Mr. Powers conducted over 1700 such transactions between December 6, 2012 and September 24, 2014, and completed these transactions by sending or receiving physical currency in person, by mail, or via wire transfer.

FinCEN shed any doubt about the application of the BSA to virtual currency in March 2013, and made clear that those like Mr. Powers who are engaged as a business in the exchange of virtual currency (exchangers) as well as those issuing and redeeming virtual currency (administrators) are generally considered MSBs within the meaning of the BSA. See FIN-2013-G001, “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies,” March 18, 2013, available here. Administrators or exchangers who “accept and transmit a convertible virtual currency” or “buy[ ] or sell[ ] convertible virtual currency” are money transmitters under the regulations implementing the BSA. See id.

In pertinent part, the BSA requires MSBs to:

  • Register with FinCEN;
  • Establish and implement a written Anti-Money Laundering (AML) program;
  • Report transactions that the MSB “knows, suspects, or has reason to suspect” are suspicious; and
  • File currency transaction reports (CTRs) for transactions that involve the physical transfer of $10,000 or more in currency.

Mr. Powers failed to follow these requirements. First, Mr. Powers did not register with FinCEN as an MSB, despite his “awareness of BSA requirements” as evidenced by his participation in “online discussions pertaining to AML compliance, including specific conversations about registering as an MSB.” See Assessment at 3.

Second, Mr. Powers failed to implement an AML program. Mr. Powers did not produce any AML policies, procedures, and internal controls documents to FinCEN and had no written policies or procedures for filing any BSA reports. Mr. Powers also openly stated that he would assist customers in circumventing AML laws. See Assessment at 4.

Third, Mr. Powers did not report any suspicious transactions, despite the fact that he “processed transactions that bore strong indicia of illicit activity.” See Assessment at 5. For example, his bitcoin wallet was associated with hundreds of transactions for customers doing business on a darknet site shut down by federal law enforcement authorities in 2013. He also conducted transactions with numerous customers who used torrent services to anonymize their location and identity, which the Assessment describes as a “strong indicator of potential illicit activity when no additional due diligence is conducted.” However, no suspicious activity reports were ever filed. See Assessment at 5-6.

Finally, Mr. Powers conducted numerous transactions which required CTRs, but failed to file any CTRs with FinCEN. The Assessment estimates that Mr. Powers should have filed 243 CTRs. See Assessment at 7.

Mr. Powers has agreed to pay a $35,350 fine and to cease providing “money transmission services” within the meaning of the BSA. The Assessment notes that in reaching the fine, it took into consideration “the extensive cooperation provided by Mr. Powers” in FinCEN’s investigation. See Assessment at 8.

Click here to read FinCEN’s Assessment of Civil Money Penalty.

Yesterday, the Internal Revenue Service’s Large Business and International division (LB&I) announced three additional compliance campaigns, bringing the total number of campaigns announced to date to 53. These campaigns reflect LB&I’s movement toward issue-based examinations and a compliance process in which LB&I decides which compliance issues that present risk require a response in the form of one or multiple treatment streams to achieve compliance objectives. This approach is intended to make the best use of the IRS’s knowledge and to deploy the right resources to address these issues. The campaigns are the culmination of an extensive effort to redefine large business compliance work and build a supportive infrastructure inside LB&I. The overall goal is to improve return selection, identify issues representing a risk of non-compliance, and make the greatest use of limited resources.

Of note, the three new campaigns are all focused on offshore activities of U.S. taxpayers, reflecting the IRS’s continuing prioritization of international tax enforcement. A description of each new campaign follows:

Captive Services Provider Campaign

The section 482 regulations and the OECD Transfer Pricing Guidelines provide rules for determining arm’s length pricing for transactions between controlled entities, including transactions in which a foreign captive subsidiary performs services exclusively for the parent or other members of the multinational group. The arm’s length price is determined by taking into consideration data available on companies performing functions, employing assets, and assuming risks that are comparable to those of the captive subsidiary. Excessive pricing for these services would inappropriately shift taxable income to these foreign entities and erode the U.S. tax base. The goal of this campaign is to ensure that U.S. multinational companies are paying their captive service providers no more than arm’s length prices. The treatment streams for this campaign are issue-based examinations and soft letters.

Offshore Private Banking Campaign

U.S. persons are subject to tax on worldwide income from all sources including income generated outside of the United States. It is not illegal or improper for U.S. taxpayers to own offshore structures, accounts, or assets. However, taxpayers must comply with income tax and information reporting requirements associated with these offshore activities. The IRS is in possession of records that identify taxpayers with transactions or accounts at offshore private banks. This campaign addresses tax noncompliance and the information reporting associated with these offshore accounts. The IRS will initially address tax noncompliance through the examination and soft letter treatment streams. Additional treatment streams may be developed based on feedback received throughout the campaign.

Loose Filed Forms 5471

Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, must be attached to an income tax return (or a partnership or exempt organization return, if applicable) and filed by the return’s due date including extensions. Some taxpayers are incorrectly filing Forms 5471 by sending the form to the IRS without attaching it to a tax return (or partnership or exempt organization return, if applicable). If a Form 5471 is required to be filed and was not attached to an original return, an amended return with the Form 5471 attached should be filed. The goal of this campaign is to improve compliance with the requirement to attach a Form 5471 to an income tax, partnership or exempt organization return.

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Yesterday the IRS announced the results of a nationwide two-week “education and enforcement campaign” regarding employment tax compliance. For several years, the IRS has made employment tax compliance a top enforcement priority, on both the civil and criminal sides. With payroll taxes withheld from employee wages accounting for nearly 72 percent of all tax revenue collected by the U.S. Treasury, employment tax noncompliance is one of the biggest problems for the IRS. The IRS announcement revealed that between March 25 and April 5, IRS Field Collection and IRS Criminal Investigation undertook a special campaign “to shore up this area of compliance.”

“Payroll taxes form a key part of our tax system,” said IRS Commissioner Chuck Rettig. “When individuals and businesses evade their employment tax obligations, it not only undermines our tax system, it also creates an unfair situation for people who are following the law. The IRS is committed to compliance in the payroll tax arena, which helps ensure fairness and faith in our tax system.”

On the civil side, IRS revenue officers made personal visits during the two-week campaign to nearly 100 businesses around the country suspected of having serious issues with employment tax compliance. Business owners were informed about ways to catch up with back payroll taxes, how to stay current and the potential for civil and criminal penalties. The Trust Fund Recovery Penalty is one example of the legal ramifications of not collecting, accounting for and paying payroll taxes to the IRS when required. “Enforcement is never our first resort, but protecting this significant source of revenue to the nation deserves our best efforts, including reaching out to help businesses help themselves,” said Darren Guillot, Director of IRS Field Collection Operations.

On the criminal enforcement side, IRS CI worked with the Department of Justice Tax Division and U.S. attorneys around the nation to focus on about 50 law enforcement actions related to employment tax crimes. During the two weeks, IRS CI indicted 12 individuals, executed four search warrants and saw six individuals or businesses sentenced for crimes associated with payroll taxes. In addition to these early numbers, roughly two dozen more enforcement actions are planned in the weeks following the two-week campaign as well.

“Employers know the rules—they must deposit and report employment taxes accurately—this is non-negotiable,” said Don Fort, Chief of IRS Criminal Investigation. “When employers fail to pay over the required employment taxes for whatever reason, they skip out on one of their most important responsibilities as a business owner. Not only are those employers cheating the system and their employees, they are cheating future generations relying on those taxes to help build the future.”

The IRS noted in its announcement that the agency has several tools to bolster payroll tax compliance including educational outreach, data analytics, civil investigations by highly trained revenue officers, as well as harsher measures such as lawsuits, seizures, and criminal referrals to IRS CI.

For more up-to-date coverage from Tax Controversy and Financial Crimes Report, please subscribe by clicking here.

With April 15 just around the corner, the Justice Department’s Tax Division has issued its annual public warning to would-be tax cheats. It is no secret that the Justice Department and Internal Revenue Service significantly ramp up their publicity campaigns regarding tax prosecutions in the weeks leading up to April 15, in an attempt to deter any taxpayer thinking about filing a false tax return or otherwise cheating on their taxes. “Filing a tax return and paying taxes are serious acts and willfully filing false and fraudulent tax returns and deliberately evading paying taxes are criminal acts,” said Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division.  “During tax season and every season, the Tax Division is committed to achieving justice through the prosecution of those who choose to engage in tax crimes.” Today’s warning includes a summary of recent criminal tax prosecutions throughout the country, as follows:

Recent Tax Prosecutions of Individuals

  • In April 2019, a Houston, Texas, man was sentenced to 360 months in prison for multiple conspiracy and tax crimes, including corporate tax evasion. The defendant engaged in the fraudulent sale of second-hand prescription drugs and tax crimes. The court imposed a criminal forfeiture money judgment of $20,326,464.17 and ordered $716,986 in restitution to the IRS.
  • In April 2019, a District of Columbia woman was sentenced to 54 months in prison for conspiring to defraud the United States and commit theft of public money and aggravated identity theft. She engaged in a fraudulent tax refund scheme and was ordered to pay $1,806,876.66 in restitution to the IRS.
  • In March 2019, a Salinas, California, woman was sentenced to 60 months in prison for conspiring to file false income tax returns and bank fraud. She was ordered to pay $1,641,610 in restitution to the IRS.
  • In January 2019, a Union, South Carolina, mechanic was sentenced to 36 months in prison for wire fraud and filing a false income tax return. After creating a false invoice scheme, he embezzled money from his employer and failed to report the income on his tax returns. He was ordered to pay $1,941,377.32 in restitution.
  • In November 2018, a Farmington, Michigan, trucking business owner was sentenced to 33 months in prison for wire fraud and willfully failing to file a tax return. The court ordered restitution of $2,919,265 to a third party victim and $142,069 to the IRS.
  • In October 2018, a former IRS-Criminal Investigation special agent was sentenced to 51 months in prison for filing false tax returns, obstruction of justice, and stealing government money. A federal jury in the Eastern District of California convicted the defendant, who was also a CPA.

Recent Employment Tax Prosecutions

  • In March 2019, a Raleigh, North Carolina, mental health executive was sentenced to 30 months in prison for failing to report and pay almost $1.7 million in employment taxes to the IRS.
  • In November 2018, a Collinsville, Virginia, pharmacist was sentenced to 41 months in prison for failing to pay over more than $5 million in employment taxes to the IRS. The defendant spent the money owed to the United States on a Jeep Grand Cherokee, a jet ski, stock market investments and real property.
  • In June 2018, a former Virginia Software Company CEO was sentenced to 21 months in prison for conspiring to defraud the government of more than $1.8 million in payroll taxes. Along with his co-conspirator, he also failed to remit the full amount of employee retirement contributions to the company’s retirement plan.

Recent Prosecutions Involving Offshore Banking

  • In March 2019, one of the largest Israeli banks, Mizrahi-Tefahot Bank Ltd., and two of its subsidiaries, United Mizrahi Bank (Switzerland) Ltd. and Mizrahi Tefahot Trust Company Ltd., entered a deferred prosecution agreement (DPA) with the Department of Justice. Mizrahi-Tefahot Bank Ltd. paid $195 million to the United States as a direct result of its role in defrauding the United States, specifically the IRS, by conspiring with U.S. taxpayer-customers and enabling U.S. taxpayers to hide income and assets from the IRS.
  • In October 2018, a Scottsdale, Arizona man, who managed a resort with family members in Pagosa Springs, Colorado, was sentenced to 18 months in prison for filing a false tax return underreporting his income and omitting $9.7 million in investment income from two offshore bank accounts in Liechtenstein.

For more up-to-date coverage from Tax Controversy and Financial Crimes Report, please subscribe by clicking here.

 

The Internal Revenue Service has included tax return preparer fraud on its “Dirty Dozen” list of common tax scams for 2019 and offered tips to help taxpayers avoid unscrupulous tax preparers. With the Tax Cuts and Jobs Act, the most sweeping tax reform legislation in more than 30 years now in effect, some taxpayers may choose to have a paid professional prepare their tax returns this year even if they have done it themselves in years past. The IRS reminds taxpayers to be careful when selecting a tax professional. Though most tax professionals provide honest, high-quality service, a minority of dishonest preparers operate each filing season perpetrating refund fraud, identity theft and other scams that hurt innocent taxpayers.

Compiled annually by the IRS, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter any time of the year, but many of these schemes peak during filing season as people prepare their tax returns or seek help from tax professionals. To help protect taxpayers, the IRS highlights each of these scams on twelve consecutive days to help raise awareness.

“Tax professionals provide an incredibly valuable service to taxpayers and our nation’s tax system,” said IRS Commissioner Chuck Rettig. “We encourage people to carefully choose who they trust with their most sensitive tax and financial information. There are some simple steps taxpayers can follow to make sure they’re getting good, professional help.”

The text of the IRS’s warning about tax return preparer fraud follows:

Tax return preparers are a vital part of the U.S. tax system. During tax year 2016, the most recent year for which complete figures are available, about 53.5 percent of taxpayers used a paid preparer. Selecting the right tax professional is vitally important. Taxpayers are ultimately responsible for the accuracy of their tax return, regardless of who prepares it. The IRS protects taxpayers by assessing significant civil penalties against shady return preparers and working with the Justice Department to shutdown scams and prosecute the criminals behind them.

Choose return preparers wisely

It is important to choose carefully when hiring an individual or firm to prepare a tax return. Well-intentioned taxpayers can be misled by preparers who don’t understand taxes or who mislead people into taking credits or deductions they aren’t entitled to claim. Scam preparers often do this to increase their fee.

Here are a few tips to consider to help avoid fraudsters:

– Look for a preparer who is available year-round. In the event questions come up about a tax return, taxpayers may need to contact the preparer after the filing season is over.

– Ask if the preparer has an IRS Preparer Tax Identification Number (PTIN). Paid tax return preparers are required to register with the IRS, have a PTIN and include it on tax returns.

– Inquire whether the tax return preparer has a professional credential (enrolled agent, certified public accountant or attorney), belongs to a professional organization or attends continuing education classes. Because tax law can be complex, competent tax preparers remain up-to-date on tax topics. The IRS website has more information regarding national tax professional organizations.

– Check the preparer’s qualifications. Use the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications. This tool can help locate a preparer with the preferred qualifications. A searchable and sortable listing of tax preparers registered with the IRS, the directory includes the name, city, state and zip code of attorneys, CPAs, enrolled agents, Annual Filing Season Program participants, enrolled retirement plan agents and enrolled actuaries.

– Check the preparer’s history. Check the Better Business Bureau website for information about the preparer. Look for disciplinary actions and the license status for credentialed preparers. For CPAs, check with the State Board of Accountancy. For attorneys, check with the State Bar Association. For Enrolled Agents, go to IRS.gov and search for “verify enrolled agent status” or check the Directory.

– Ask about service fees. Avoid preparers who base fees on a percentage of their client’s refund or boast bigger refunds than their competition. Don’t give tax documents, Social Security numbers or other information to a preparer if merely inquiring about their services and fees. Unfortunately, some unscrupulous preparers have used this information to improperly file returns without the taxpayer’s permission.

– Make sure the preparer offers IRS e-file and ask to e-file the tax return. Paid preparers who do taxes for more than 10 clients generally must file electronically. Since electronic filing began in the 1980s, the IRS has processed more than 1.5 billion e-filed individual tax returns. It’s the safest and most accurate way to file.

– Provide records and receipts. Good preparers ask to see these documents. They’ll also ask questions to determine the client’s total income, deductions, tax credits and other items. Do not hire a preparer who e-files a tax return using a pay stub instead of a Form W-2. This is against IRS e-file rules.

– Understand representation rules. Attorneys, CPAs and enrolled agents can represent any client before the IRS in any situation. Annual Filing Season Program participants may represent taxpayers in limited situations if they prepared and signed the tax return. However, non-credentialed preparers who do not participate in this program may only represent clients on returns they prepared and signed before the end of 2015.

– Never sign a blank or incomplete return.

– Review the tax return before signing. Be sure to ask questions if something is not clear or appears inaccurate. Any refund should go directly to the taxpayer – not into the preparer’s bank account. Reviewing the routing and bank account number on the completed return is always a good idea.

– Report abusive tax preparers to the IRS. Use Form 14157, Complaint: Tax Return Preparer. If a return preparer is suspected of filing or changing the return without the client’s consent, also file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit. Forms are available on IRS.gov.

www.irs.gov/chooseataxpro has additional information to help taxpayers including tips on choosing a preparer, the differences in credentials and qualifications, as well as how to submit a complaint regarding an unscrupulous tax return preparer.

For more up-to-date coverage from Tax Controversy and Financial Crimes Report, please subscribe by clicking here.

Despite a steep drop in tax-related identity theft in recent years, the Internal Revenue Service warns taxpayers that the scam remains serious enough to earn a spot on the 2019 “Dirty Dozen” list of tax scams. “Taxpayers should continue to protect their sensitive tax and financial data to help protect against identity thieves,” IRS Commissioner Chuck Rettig said. “The IRS and the Security Summit partners in the states and the private sector have joined forces to improve our defenses against tax-related identity theft, sharply reducing the number of victims. But we encourage taxpayers to continue to be on the lookout for identity theft schemes, including email phishing attempts and other tax scams.”

Compiled annually by the IRS, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter any time of the year, but many of these schemes peak during filing season as people prepare their tax returns or seek help from tax professionals. To help protect taxpayers, the IRS highlights each of these scams on twelve consecutive days to help raise awareness.

The text of the IRS’s warning about identity theft follows:

Tax-related identity theft occurs when someone uses a stolen Social Security number or Individual Taxpayer Identification Number (ITIN) to file a fraudulent tax return claiming a refund.

The IRS, the states and the nation’s private-sector tax industry began working together in 2015 as the Security Summit to fight tax-related identity theft. Security Summit partners enacted a series of safeguards that are making inroads against identity thieves and protecting taxpayers. These safeguards include expanded information sharing among the Summit partners as well as strengthened internal IRS controls to guard against fraudulent tax returns.

Taxpayers should remember that identity thieves constantly strive to find a scheme that works. Once their ruse begins to fail as taxpayers become aware of their ploys, they change tactics. Taxpayers and tax professionals must remain vigilant to the various scams and schemes used for data thefts. Business filers should be aware that cybercriminals also file fraudulent Forms 1120, U.S. Corporate Income Tax Return, using stolen business identities and they, too, should be alert.

Security tips for taxpayers, tax professionals

The IRS and its partners remind taxpayers and tax professionals that they can do their part to help in this effort. Taxpayers and tax professionals should:

– Always use security software with firewall and antivirus protections. Make sure security software is turned on and can automatically update. Encrypt sensitive files such as tax records stored on the computer. Use strong passwords.

– Learn to recognize and avoid phishing emails and threatening phone calls and texts from thieves posing as legitimate organizations such as banks, credit card companies and government organizations, including the IRS. Do not click on links or download attachments from unknown or suspicious emails. Invest in good anti-spyware and anti-malware software protection.

– Protect personal data. Don’t routinely carry a Social Security card, and make sure tax records are secure. Treat personal information like cash; don’t leave it lying around.

The Security Summit has worked to increase awareness among taxpayers and tax professionals about tax-related identity theft and security steps through its “Taxes. Security. Together.” and “Protect Your Clients; Protect Yourself” campaigns.

Reversing the damage caused by identity theft is often a frustrating and complex process for victims. While identity thieves steal information from sources outside the tax system, the IRS is often the first to inform a victim that identity theft has occurred. The IRS is working diligently to resolve identity theft cases quickly. For more information, see the special identity theft section on IRS.gov.

For more up-to-date coverage from Tax Controversy and Financial Crimes Report, please subscribe by clicking here.

By Matthew D. Lee and Marissa Koblitz Kingman

In a ruling that significantly curbs the power of state and local law enforcement authorities to seek forfeiture of assets connected to criminal activity, the U.S. Supreme Court recently held that the Eighth Amendment’s Excessive Fines Clause applies to the states.

Civil forfeiture laws permit prosecutors and police to seize assets connected to criminal activity. Since the 1980s, the use of civil forfeiture has skyrocketed as part of the overall war on drugs as federal, state, and local law enforcement agencies have used it to seize billions of dollars worth of assets, such as automobiles, boats, airplanes and real estate, as well as cash and bank accounts.

The practice has become highly controversial, however, as most laws permit forfeiture against so-called “innocent owners” who have not been convicted of (or even charged with) a crime, and forfeitures are often wildly disproportionate to the underlying criminal offense. In addition, civil forfeiture laws often allow law enforcement agencies to retain the forfeited assets, thereby creating inherent conflicts of interest in forfeiture practices. At the federal level, forfeiture powers are constrained by the Excessive Fines Clause, but that provision has never been held to apply to the states.

Until now.

In a unanimous decision authored by Justice Ruth Bader Ginsburg, the Supreme Court limited the ability of state and local law enforcement agencies to seek civil forfeiture of assets alleged to be connected to criminal activity. In particular, the Court declares that state civil forfeitures should now be judged on whether they are grossly disproportionate to the gravity of the underlying offense.

In Timbs v. Indiana, the Supreme Court held that states must use the same type of analysis employed by the trial court in Timbs’s case, comparing the value of the seized vehicle to the maximum monetary penalty that could be assessed against him as part of his conviction. This decision should also provide much-needed protection to “innocent owners” of property subject to forfeiture.

Background

Tyson Timbs had pleaded guilty to state drug trafficking and theft charges. At the time of his arrest, the police also seized his Land Rover, which he purchased for approximately $42,000. The state later sought forfeiture of the vehicle, claiming that it had been used to transport heroin. The trial court denied the forfeiture request, finding that forfeiture of the Land Rover would be grossly disproportionate to the gravity of Timbs’s offense, thereby violating the Eighth Amendment’s Excessive Fines Clause. In making this finding, the trial court observed that the value of the Land Rover was more than four times the maximum $10,000 fine he faced for his drug conviction.

Indiana’s intermediate court of appeals affirmed, but the Indiana Supreme Court reversed, holding that the Excessive Fines Clause applies only to federal action and is inapplicable at the state level. The U.S. Supreme Court granted certiorari to address the question of whether the Eighth Amendment’s Excessive Fines Clause applies to the states, an issue that had never been addressed by the high court.

The Court’s Analysis

The Eighth Amendment proscribes that “[e]xcessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.” In her opinion for the Court, Justice Ginsburg traced what she called the “venerable lineage” of the Excessive Fines Clause to 1215, when the Magna Carta mandated that economic sanctions “be proportioned to the wrong.” This principle was recognized in the U.S. colonies, first in the Virginia Declaration of Rights and later, by 1787, when eight state constitutions outlawed excessive fines. By 1868, the constitutions of nearly every state expressly prohibited excessive fines.

Justice Ginsburg also emphasized that the protection against excessive fines has been a “constant shield” in our country’s history, and must remain so. Protection against excessive punitive economic sanctions is both “fundamental to our scheme of ordered liberty” and “deeply rooted in this Nation’s history and tradition.” The case for concluding that the Excessive Fines Clause applies to the states, Justice Ginsburg concluded, is therefore “overwhelming.”

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In the second installment of its annual “Dirty Dozen” list, the Internal Revenue Service is warning taxpayers to be alert to tax time phone scams where aggressive criminals pose as IRS agents in hopes of stealing money or personal information. Phone scams or “vishing” (voice phishing) continue to pose a major threat. The scam has cost thousands of people millions of dollars in recent years, and the IRS continues to see variations on these aggressive calling schemes. The IRS also urges taxpayers to help protect themselves against phone scams and identity theft by reviewing safety tips prepared by the Security Summit, a collaborative effort between the IRS, states and the private-sector tax community.

Compiled annually by the IRS, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter any time of the year, but many of these schemes peak during filing season as people prepare their tax returns or seek help from tax professionals. To help protect taxpayers, the IRS highlights each of these scams on twelve consecutive days to help raise awareness.

“Taxpayers should be on the lookout for unexpected and aggressive phone calls purportedly coming from the IRS,” said IRS Commissioner Chuck Rettig. “These calls can feature scam artists aggressively ordering immediate payment and making threats against a person. Don’t fall for these.”

The text of the IRS’s warning about telephone scams follows:

Beginning early in the filing season, the IRS generally sees an upswing in scam phone calls threatening arrest, deportation or license revocation, if the victim doesn’t pay a bogus tax bill. These calls most often take the form of a “robo-call” (a text-to-speech recorded voicemail with instructions to call back a specific telephone number), but in some cases may be made by a real person. These con artists may have some of the taxpayer’s information, including their address, the last four digits of their Social Security number or other personal details.

The Treasury Inspector General for Tax Administration (TIGTA), the federal agency that investigates tax-related phone scams, says these types of scams have cost 14,700 victims a total of more than $72 million since October 2013.

How do the scams work?

Criminals make unsolicited calls and leave voicemails with urgent callback requests claiming to be IRS officials. They demand that the victim pay a bogus tax bill by sending cash through a wire transfer, prepaid debit card or gift card.

Many phone scammers use threats to intimidate and bully a victim into paying. The phone scammers may alter or “spoof” their caller ID to make it look like the IRS or another agency is calling. The callers may use IRS employee titles and fake badge numbers to appear legitimate.

The IRS also reminds taxpayers that scammers often change tactics. Variations of the IRS impersonation scam continue year-round and tend to peak when scammers find prime opportunities to strike. Tax scams can be more believable during the tax filing season when people are thinking about their taxes.

Here are some things the scammers often do, but the IRS will not do. Taxpayers should remember that any one of these is a tell-tale sign of a scam.

The IRS will never:

– Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail a bill to any taxpayer who owes taxes.

– Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.

– Demand that taxes be paid without giving taxpayers the opportunity to question or appeal the amount owed.

– Ask for credit or debit card numbers over the phone.

– Call about an unexpected refund.

For taxpayers who don’t owe taxes or don’t think they do:

– Please report IRS or Treasury-related fraudulent calls to phishing@irs.gov (Subject: IRS Phone Scam).

– Do not give out any information. Hang up immediately. The longer the con artist is engaged; the more opportunity he/she believes exists, potentially prompting more calls.

– Contact TIGTA to report the call. Use their IRS Impersonation Scam Reporting web page. Alternatively, call 800-366-4484.

– Report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add “IRS Telephone Scam” in the notes.

For those who owe taxes or think they do:

– Call the IRS at 800-829-1040. IRS workers can help.

– View tax account online. Taxpayers can see their past 24 months of payment history, payoff amount and balance of each tax year owed.

Stay alert to scams that use the IRS or other legitimate companies and agencies as a lure. Tax scams can happen any time of year, not just at tax time. For more information visit Tax Scams and Consumer Alerts on IRS.gov.

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With the 2019 tax filing season in full swing, and April 15 only a few days away, the Internal Revenue Service has once again unveiled its annual list of the most prevalent tax scams facing taxpayers and tax professionals, which it calls the “Dirty Dozen.” Leading the “Dirty Dozen” for 2019 are internet-based “phishing” scams that lead to tax-related fraud and identity theft. The IRS warns taxpayers, businesses and tax professionals to be alert for a continuing surge of fake emails, text messages, websites and social media attempts to steal personal information. These attacks tend to increase during tax season and remain a major danger of identity theft.

Compiled annually by the IRS, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter any time of the year, but many of these schemes peak during filing season as people prepare their tax returns or seek help from tax professionals. To help protect taxpayers, the IRS highlights each of these scams on twelve consecutive days to help raise awareness.

“Taxpayers should be on constant guard for these phishing schemes, which can be tricky and cleverly disguised to look like it’s the IRS,” said IRS Commissioner Chuck Rettig. “Watch out for emails and other scams posing as the IRS, promising a big refund or personally threatening people. Don’t open attachments and click on links in emails. Don’t fall victim to phishing or other common scams.” The IRS also urges taxpayers to learn how to protect themselves by reviewing safety tips prepared by the Security Summit, a collaborative effort between the IRS, state revenue departments and the private-sector tax community. “Taking some basic security steps and being cautious can help protect people and their sensitive tax and financial data,” Rettig said.

The text of the IRS’s warning regarding phishing scams follows:

New variations on phishing schemes

The IRS continues to see a steady stream of new and evolving phishing schemes as criminals work to victimize taxpayers throughout the year. Whether through legitimate-looking emails with fake, but convincing website landing pages, or social media approaches, perhaps using a shortened URL, the end goal is the same for these con artists: stealing personal information.

In one variation, taxpayers are victimized by a creative scheme that involves their own bank account. After stealing personal data and filing fraudulent tax returns, criminals use taxpayers’ bank accounts to direct deposit tax refunds. Thieves then use various tactics to reclaim the refund from the taxpayer, including falsely claiming to be from a collection agency or the IRS. The IRS encourages taxpayers to review some basic tips if they see an unexpected deposit in their bank account.

Schemes aimed at tax pros, payroll offices, human resources personnel

The IRS has also seen more advanced phishing schemes targeting the personal or financial information available in the files of tax professionals, payroll professionals, human resources personnel, schools and organizations such as Form W-2 information. These targeted scams are known as business email compromise (BEC) or business email spoofing (BES) scams.

Depending on the variation of the scam (and there are several), criminals will pose as:

– a business asking the recipient to pay a fake invoice

– as an employee seeking to re-route a direct deposit

– or as someone the taxpayer trusts or recognizes, such as an executive, to initiate a wire transfer.

The IRS warned of the direct deposit variation of the BEC/BES scam in December 2018, and continues to receive reports of direct deposit scams reported to phishing@irs.gov. The Direct Deposit and other BEC/BES variations should be forwarded to the Internet Crime Complaint Center (IC3). The IRS requests that Form W-2 scams be reported to: phishing@irs.gov (Subject: W-2 Scam).

Criminals may use the email credentials from a successful phishing attack, known as an email account compromise, to send phishing emails to the victim’s email contacts. Tax preparers should be wary of unsolicited email from personal or business contacts especially the more commonly observed scams, like new client solicitations.

Malicious emails and websites can infect a taxpayer’s computer with malware without the user knowing it. The malware downloads in the background, giving the criminal access to the device, enabling them to access any sensitive files or even track keyboard strokes, exposing login victim’s information.

For those participating in these schemes, such activity can lead to significant penalties and possible criminal prosecution. Both the Treasury Inspector General for Tax Administration (TIGTA), which handles scams involving IRS impersonation, and the IRS Criminal Investigation Division work closely with the Department of Justice to shut down scams and prosecute the criminals behind them.

Tax Professional Alert

Numerous data breaches across the country mean the tax preparation community must be on high alert to unusual activity, particularly during the tax filing season. Criminals increasingly target tax professionals, deploying various types of phishing emails in an attempt to access client data. Thieves may use this data to impersonate taxpayers and file fraudulent tax returns for refunds.

As part of the Security Summit initiative, the IRS has joined with representatives of the software industry, tax preparation firms, payroll and tax financial product processors and state tax administrators to combat identity theft refund fraud to protect the nation’s taxpayers.

The Security Summit partners encourage tax practitioners to be wary of communicating solely by email with potential or existing clients, especially if unusual requests are made. Data breach thefts have given thieves millions of identity data points including names, addresses, Social Security numbers and email addresses. If in doubt, tax practitioners should call to confirm a client’s identity.

Reporting Phishing Attempts

If a taxpayer receives an unsolicited email or social media attempt that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), they should report it by sending it to phishing@irs.gov. Learn more by going to the Report Phishing and Online Scams page on IRS.gov.

Tax professionals who receive unsolicited and suspicious emails that appear to be from the IRS and/or are tax-related (like those related to the e-Services program) also should report it to: phishing@irs.gov.

The IRS generally does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.

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Our colleagues Richard S. Caputo and Jacqueline Motyl have published the second of their two-part Alert to guide nonprofit organizations in preparing for upcoming tax filing deadlines and best practices for the onset of a fiscal year.  In Part 1 (available here), they discussed Form 990/990-PF requirements, Solicitation of Funds registration requirements, Change in Officer/Director notification requirements, and appropriate insurance coverage.  In Part II (available here), they focus on donor letters, bylaws and corporate records.

For more up-to-date coverage from Tax Controversy and Financial Crimes Report, please subscribe by clicking here.