IRS "Dirty Dozen"

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Tomorrow is the annual deadline for the filing of individual income tax returns for calendar year 2017.  The Internal Revenue Service expects to receive approximately 32 million returns in the final days leading up to April 17.  In addition, the IRS expects to receive about 12 million last-minute requests for extensions of the April 17 filing deadline.  With millions of taxpayers scrambling to meet tomorrow’s deadline, we provide this recap of the IRS’s annual list of the “Dirty Dozen” tax scams for 2018 and a link to our prior blog posts addressing each one.

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 highlighted each of these scams on twelve consecutive days leading up to the filing deadline to help raise awareness.

1. “Phishing” scams: These schemes typically take the form of fake emails or websites looking to steal personal tax information and often increase in frequency during tax season.

2. Phone scams where criminals pose as IRS agents: In aggressive phone scams, criminals pose as IRS agents in hopes of stealing money. During filing season, the IRS generally sees a surge in scam phone calls threatening such things as arrest, deportation, and/or license revocation if the victim does not pay a phony tax bill. In a new variation, the IRS has observed that identity thieves are filing fraudulent tax returns with refunds going into the real taxpayer’s bank account, followed shortly thereafter by a threatening phone call trying to convince the taxpayer to send the money to the fraudster.

3. Identity theft: Even though instances of tax-related identity theft have declined markedly in recent years, the IRS warns that this practice is still widespread and remains serious enough to earn a spot on its annual list of tax scams. 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.

4. Tax return preparer fraud: With more than half of the nation’s taxpayers relying on someone else to prepare their tax return, the IRS reminds consumers today to be on the lookout for unscrupulous tax preparers looking to make a fast buck from honest people seeking tax assistance. The IRS recognizes that the majority of tax professionals provide honest, high-quality service. But there are some dishonest preparers who operate each filing season to perpetrate refund fraud, identity theft, and other scams that hurt honest taxpayers.

5. Fake charities: Scam groups masquerade as charitable organizations, luring people to make donations to groups or causes that don’t actually qualify for a tax deduction.

6. Falsely inflated refunds:  Scam artists frequently prey on older Americans, low-income taxpayers, and others with promises of big refunds.

7.  Improper claims for business credits:  Two common credits targeted for abuse include the research credit and the fuel tax credit. While both credits have legitimate uses, there are specific criteria that must be met in order to qualify for them.

8.  Falsely padding deductions:  Common areas targeted by unscrupulous tax preparers involve overstating deductions such as charitable contributions, padding business expenses, or improperly claiming credits such as the Earned Income Tax Credit or Child Tax Credit.

9.  Falsified income and fake Form 1099 scams:   A common tax scam the IRS sees each year involves falsifying income in order to claim refundable credits, such as the Earned Income Tax Credit. Another frequent scheme involves the filing of false Forms 1099 and/or bogus financial instruments such as bonds, bonded promissory notes, or worthless checks.

10.  Frivolous tax arguments:  Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish legal claims to avoid paying their taxes. Such arguments have been repeatedly thrown out of court.

11.  Abusive tax shelters:  These sophisticated schemes, particularly those involving micro-captive insurance shelters, are peddled by promoters and others to avoid taxes.

12.  Offshore tax evasion: Offshore tax compliance has been a major focus for the IRS in recent years, and taxpayers who avoid taxes by hiding money or assets in unreported offshore accounts should remain wary given the continuing focus on such schemes by both the IRS and the Justice Department.

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The Internal Revenue Service has warned taxpayers to be wary of abusive tax shelters, which remain on the annual “Dirty Dozen” list of tax scams for 2018. These sophisticated schemes, particularly those involving micro-captive insurance shelters, can be peddled by promoters and others to avoid taxes.

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 is highlighting each of these scams on twelve consecutive days to help raise awareness.

The text of the IRS announcement follows:

These scams can range from simple schemes to inflate refunds to more elaborate efforts related to tax shelters.

Through audits, litigation, published guidance and legislation, the IRS continues to address those using abusive micro-captive insurance tax shelters.

Tax law generally allows businesses to create “captive” insurance companies to protect against certain risks. Traditional captive insurance typically allows a taxpayer to reduce insurance costs. The insured business claims deductions for premiums paid for insurance policies. Those amounts are paid, either as insurance premiums or reinsurance premiums, to a “captive” insurance company owned by the insured or parties related to the insured.

Under section 831(b) of the tax code, captive insurers that qualify as small insurance companies can elect to exclude limited amounts of annual net premiums from income so that the captive insurer pays tax only on its investment income.

In certain “micro-captive” structures, promoters, accountants or wealth planners persuade owners of closely-held entities to participate in schemes that lack many of the attributes of genuine insurance.

For example, coverages may insure implausible risks, fail to match genuine business needs, or duplicate the taxpayer’s commercial coverages. Premium amounts may be unsupported by underwriting or actuarial analysis, may be geared to a desired deduction amount or may be significantly higher than premiums for comparable commercial coverage. Policies may contain vague, ambiguous or deceptive terms and otherwise fail to meet industry or regulatory standards. Claims’ administrative processes may be insufficient or altogether absent. Insureds may fail to file claims that are seemingly covered by the captive insurance.

Micro-captives may invest in illiquid or speculative assets or loans or otherwise transfer capital to or for the benefit of the insured, the captive’s owners or other related persons or entities.  Captives may also be formed to advance inter-generational wealth transfer objectives and avoid estate and gift taxes. Promoters, reinsurers and captive insurance managers may share common ownership interests that result in conflicts of interest.

In Avrahami v. Commissioner, the U.S. Tax Court disallowed premium deductions the taxpayer had claimed under a section 831(b) micro-captive arrangement, concluding that the arrangement was not “insurance” under long established decisional law principles. To qualify as insurance under those principles, an arrangement must involve risk shifting, risk distribution and insurance risk, and must also meet commonly accepted notions of insurance. The Avrahami court concluded that the taxpayer’s arrangement failed to distribute risk and that the taxpayer’s captive was not a bona fide insurance company. The court pointed to a number of facts that it found problematic, including circular flows of funds, grossly excessive premiums, non-arm’s length contracts, and an ultra-low probability of claims being paid. The court also concluded that the arrangement was not insurance in the commonly accepted sense, due in part to haphazard organization and operation, the captive’s investments in illiquid assets, unclear policies, and inflated premiums.

In Notice 2016-66 (Nov. 1, 2016), the IRS advised that micro-captive insurance transactions have the potential for tax avoidance or evasion. The notice designated transactions that are the same as or substantially similar to transactions that are described in the notice as “Transactions of Interest.” The notice established reporting requirements for those entering into such transactions on or after Nov. 2, 2006, and created disclosure and list maintenance obligations for material advisors.

Separately, Congress has also acted to curb micro-captive abuses. The Protecting Americans from Tax Hikes (PATH) Act, effective Jan. 1, 2017, established strict diversification and reporting requirements for new and existing captives.

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As part of its annual “Dirty Dozen” list of tax scams, the Internal Revenue Service warned taxpayers of schemes that falsify income or involve phony Forms 1099. A common tax scam the IRS sees each year involves falsifying income in order to claim refundable credits, such as the Earned Income Tax Credit. Another frequent scheme involves the filing of false Forms 1099 and/or bogus financial instruments such as bonds, bonded promissory notes, or worthless checks.

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 is highlighting each of these scams on twelve consecutive days to help raise awareness.

The text of the IRS announcement follows:

Don’t Make Up Income

Some people falsely increase the income they report to the IRS. This scam involves inflating or including income on a tax return that was never earned, either as wages or self-employment income, usually to maximize refundable tax credits.

Much like falsely claiming an expense or deduction is improper, claiming income the taxpayer didn’t earn is also inappropriate. Unscrupulous return preparers and people do this to secure larger refundable credits such as the Earned Income Tax Credit and it can have serious repercussions.

Remember, taxpayers can face a large bill to repay the erroneous refunds, including interest and penalties. In some cases, they may even face criminal prosecution.

Fake Forms 1099-MISC

The IRS cautions taxpayers to avoid getting caught up in schemes disguised as a debt payment option for credit cards or mortgage debt. This scheme usually involves the filing of a Form 1099-MISC, Miscellaneous Income, and/or bogus financial instruments such as bonds, bonded promissory notes or worthless checks.

Con artists often argue that the proper way to redeem or draw on a fictitious “held-aside” account is to use some form of made-up financial instrument, such as a bonded promissory note, that purports to be a debt payment method for credit cards or mortgage debt. Scammers provide fraudulent Form(s) 1099-MISC that appear to be issued by a large bank, loan service and/or mortgage company with which the taxpayer may have had a prior relationship, all to help further perpetrate the scheme. Form 56, Notice Concerning Fiduciary Relationship, may also be used by participants in this scam to assign fiduciary responsibilities to the lenders.

Taxpayers may encounter unethical return preparers who try to lure them into these scams. It is important to remember that taxpayers are legally responsible for what’s on their tax return even if it is prepared by someone else.

Choose Return Preparers Carefully

It is important to choose carefully when hiring an individual or firm to prepare tax returns. Well-intentioned taxpayers can be misled by tax preparers who don’t understand taxes or who mislead people into taking credits or deductions they aren’t entitled to in order to increase their fee. Every year, these types of tax preparers face everything from penalties to jail time for defrauding their clients.

To find tips about choosing a preparer, better understand the differences in tax credentials and qualifications, research the IRS preparer directory and learn how to submit a complaint regarding an unscrupulous tax return preparer, visit www.irs.gov/chooseataxpro.

For more up-to-date coverage from Tax Controversy Sentinel, please subscribe by clicking here.

The Internal Revenue Service has issued a warning to taxpayers about using frivolous tax arguments to avoid paying taxes. Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish legal claims to avoid paying their taxes. Such arguments have been repeatedly thrown out of court.

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 is highlighting each of these scams on twelve consecutive days to help raise awareness.

The text of the IRS announcement follows:

A recurring Dirty Dozen theme through the years involves claims about “secret” schemes to avoid people paying taxes.

In “The Truth about Frivolous Tax Arguments,” the IRS outlines some of the more common frivolous arguments, explains why they’re wrong and cites relevant court decisions. Examples include:

 – The First Amendment allows taxpayers to refuse to pay taxes on religious or moral grounds;

 – The only “employees” subject to federal income tax are those who work for the federal government;

 – Only foreign-source income is taxable.

Perpetrators of illegal scams, as well as those who make use of them, may face possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice to shut down scams and prosecute the criminals behind them.

Don’t Get Talked Into Using a Frivolous Argument

Taxpayers have the right to contest their tax liabilities using IRS administrative appeals procedures or in court, but they are still obligated to follow the law.

Besides risking criminal prosecution, taxpayers can also face a variety of civil penalties. Key among them is the $5,000 penalty for filing a frivolous tax return. The penalty applies to anyone who submits a frivolous tax return or other specified submissions, such as a request for a collection due process hearing, installment agreement, offer-in-compromise, or taxpayer assistance order, if any part of these submissions are based on a frivolous position. A list of more than 40 such positions can be found in Notice 2010-33, 2010-17 I.R.B.609. The list is not all inclusive, and the IRS and the courts may add to it at any time.

The IRS reminds taxpayers these schemes also can bring other civil penalties including:

– Accuracy-related penalty—20 percent of the underpaid tax;

– Civil fraud penalty—75 percent of the underpayment attributable to fraud;

– Erroneous refund claim penalty—20 percent of the excessive amount.

Late-filing and late-payment penalties may also apply. The Tax Court may also impose a penalty against taxpayers who make frivolous arguments in court.

Further details, including a list of the Dirty Dozen and information about other tax scams, can be found on IRS.gov.

For more up-to-date coverage from Tax Controversy Sentinel, please subscribe by clicking here.

As part of its annual “Dirty Dozen” list of tax scams, the Internal Revenue Service warned taxpayers to avoid falsely inflating deductions or expenses on tax returns. Common areas targeted by unscrupulous tax preparers involve overstating deductions such as charitable contributions, padding business expenses, or improperly claiming credits such as the Earned Income Tax Credit or Child Tax Credit.

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 is highlighting each of these scams on twelve consecutive days to help raise awareness.

The text of the IRS announcement follows:

Padding deductions is part of this year’s “Dirty Dozen” lists of common tax scams. Taxpayers may encounter these any time, but many of these schemes peak during the tax filing season as people prepare their returns or hire people to help with their taxes.

The IRS reminds taxpayers to be careful when claiming these credits. If a return preparer suggests using these options improperly, the taxpayer is at risk – and the person who provided the advice is long gone.

Avoid Scams and File an Accurate Return

Preparing an accurate tax return is a taxpayer’s best defense against scams – and the best way to avoid triggering an audit. The IRS reminds taxpayers that significant penalties may apply for taxpayers who file incorrect returns including:

– 20 percent of the disallowed amount for filing an erroneous claim for a refund or credit.

– $5,000 if the IRS determines a taxpayer has filed a “frivolous tax return.” A frivolous tax return is one that does not include enough information to figure the correct tax or that contains information clearly showing that the tax reported is substantially incorrect.

– In addition to the full amount of tax owed, a taxpayer could be assessed a penalty of 75 percent of the amount owed if the underpayment on the tax return resulted from tax fraud.

Taxpayers may be subject to criminal prosecution and be brought to trial for actions such as willful failure to file a return; supply information; or pay any tax due; fraud and false statements; preparing and filing a fraudulent return and identity theft.

One way for taxpayers to ensure they file an accurate tax return and claim only the tax benefits they’re eligible to receive is by using tax preparation software. Question and answer formats lead taxpayers through each section of the return. Prepare and e-file federal taxes free with IRS Free File. Taxpayers with income of $66,000 or less can file using free brand-name tax software. Those who earned more can use Free File Fillable Forms, the electronic version of IRS paper forms. Either way, everyone has a free e-file option, and the only way to access Free File is on IRS.gov.

Community-based volunteers at locations around the country also provide free face-to-face tax assistance to qualifying taxpayers. Volunteers help taxpayers file taxes correctly, claiming only the credits and deductions they’re entitled to by law.

Taxpayers should know that they are legally responsible for what is on their tax return, even if it is prepared by someone else.

To find tips about choosing a return preparer, better understand the differences in credentials and qualifications, research the IRS preparer directory, and learn how to submit a complaint regarding a tax return preparer, visit www.irs.gov/chooseataxpro.

More information about IRS audits, the balance due collection process and possible civil and criminal penalties for noncompliance is available at the IRS website.

Taxpayers can also learn more about the Taxpayer Bill of Rights at IRS.gov. This is a set of fundamental rights each taxpayer should be aware of when dealing with the IRS, including when the IRS audits a tax return.

For more up-to-date coverage from Tax Controversy Sentinel, please subscribe by clicking here.

The Internal Revenue Service has warned taxpayers to avoid making improper claims for business credits, a common scam used by unscrupulous tax preparers. Two common credits targeted for abuse include the research credit and the fuel tax credit. While both credits have legitimate uses, there are specific criteria that must be met in order to qualify for them.

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 is highlighting each of these scams on twelve consecutive days to help raise awareness.

The text of the IRS announcement follows:

As part of the 2018 “Dirty Dozen” tax scams, the IRS reminds taxpayers to watch out for these red flags involving business credits when dealing with return preparers. Remember, the taxpayer is responsible for the information on the tax return long after the scammer is gone.

Each year, the IRS publishes its “Dirty Dozen” list of a variety of common scams that taxpayers may encounter any time. These can especially peak during the tax filing season as people prepare their returns or hire people to help with their taxes.

Research Credit Scams

Section 41 of the Internal Revenue Code provides a credit for increasing research activities, commonly known as the “research credit.” Congress enacted the research credit in 1981 to provide an incentive for American private industry to invest in research and experimentation.

The IRS continues to see significant misuse of the research credit. Improper claims for this credit generally involve a failure to participate in or substantiate qualified research activities and/or a failure to satisfy the requirements related to qualified research expenses.

To qualify for the credit, a taxpayer’s research activities must, among other things, involve a process of experimentation using science with a goal of improving a product or process the taxpayer uses in its business or holds for sale or lease. However, there are certain activities specifically excluded from the credit, including research after commercial production, adaptation of an existing business product or process, foreign research and research funded by the customer. Qualified activities also do not include activities where there is no uncertainty about the taxpayer’s method or capability to achieve a desired result.

The IRS often sees expenses from non-qualified activities included in claims for the research credit. In addition, qualified research expenses include only in-house wages and supply expenses and 65 percent (typically) of payments to contractors. Qualified research expenses do not include expenses without a proven nexus between the claimed expenses and the qualified research activity.

Steps to Properly Claim the Credit

Taxpayers who qualify for the credit may claim up to 20 percent of qualified expenses above a base amount by completing and attaching Form 6765, Credit for Increasing Research Activities, to their tax return. For tax years beginning in 2016, eligible small businesses may use the research credit to offset the alternative minimum tax. Also for tax years beginning in 2016, qualified small businesses may elect to use a portion of the research credit as a payroll tax credit against the employer’s portion of the Social Security tax. Qualified small businesses make this election on Form 6765 and must complete and attach Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities, to their Form 941, Employer’s Quarterly Federal Tax Return.

To claim a research credit, taxpayers must evaluate and document their research activities contemporaneously (i.e. over the period of time in which the research occurs) to establish the amount of qualified research expenses paid for each qualified research activity. While taxpayers may estimate some research expenses, taxpayers must have a factual basis for the assumptions used to create the estimates.

Unsupported claims for the research credit may subject taxpayers to penalties. Taxpayers should carefully review reports or studies prepared by third parties to ensure they accurately reflect the taxpayer’s activities. Third parties who are involved in the preparation of improper claims or research credit studies also may be subject to penalties

Fuel Tax Credit Scams

Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000. Furthermore, illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice to shut down scams and prosecute the criminals behind them.

The fuel tax credit is generally limited to off-highway business use or use in farming.  Consequently, the credit is not available to most taxpayers. Still, the IRS routinely finds unscrupulous tax return preparers who have enticed sizable groups of taxpayers to erroneously claim the credit to inflate their refunds.

The federal government taxes gasoline, diesel fuel, kerosene, alternative fuels and certain other types of fuel. Certain commercial uses of these fuels are nontaxable. Individuals and businesses that purchase fuel for one of those purposes can claim a tax credit by filing Form 4136, Credit for Federal Tax Paid on Fuels.

The tax is on fuels used to power vehicles and equipment on roads and highways. Taxes paid for fuel to power vehicles and equipment used off-road may qualify for the tax credit and may include farm equipment, certain boats, trains and airplanes.

Improper claims for the fuel tax credit generally come in two forms. An individual or business may make an erroneous claim on their otherwise legitimate tax return. It is also possible for an identity thief to claim the credit as part of a broader fraudulent scheme.

The IRS has taken a number of steps to improve compliance processes involving fuel tax credits. IRS compliance systems are preventing a significant number of questionable fuel tax credit claims from being processed. For example, new identity theft screening filters have also improved the IRS’s ability to identify questionable fuel tax credit claims during return processing.

For more up-to-date coverage from Tax Controversy Sentinel, please subscribe by clicking here.

The Internal Revenue Service has warned taxpayers to be alert to unscrupulous return preparers touting inflated tax refunds. According to the IRS, these scam artists frequently prey on older Americans, low-income taxpayers, and others with promises of big refunds. These refund scams remain on the annual “Dirty Dozen” list of most common tax scams, particularly during tax filing season.

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 is highlighting each of these scams on twelve consecutive days to help raise awareness.

The text of the IRS announcement follows:

Scam artists pose as tax preparers during tax time, luring victims by promising large federal tax refunds. They use flyers, advertisements, phony storefronts or word of mouth to attract victims. They may even make presentations through community groups or churches.

Scammers frequently prey on people who do not have a filing requirement, such as those with low incomes or older Americans. They may also prey on non-English speakers who may or may not have a requirement to file a tax return.

Con artists dupe people into making claims for fictitious rebates, benefits or tax credits. They may also file a false return in their client’s name, and the client never knows that a refund was paid.

Scam artists may also victimize those with a filing requirement who are due a refund. They do this by promising larger refunds based on fake Social Security benefits and false claims for education credits or the Earned Income Tax Credit (EITC) among others.

Those perpetrating these scams can see significant penalties and interest and possible criminal prosecution. To protect taxpayers, the IRS Criminal Investigation Division works closely with the Department of Justice to shutdown scams and prosecute the criminals behind them.

Falsely Claiming Zero Wages, Filing Phony Forms W-2, 1099

For years, the IRS has seen a series of contorted and creative efforts by scam artists who try to avoid taxes.

Filing a phony information return, such as a Form 1099 or W-2, is an illegal way to lower the amount of taxes owed. The use of self-prepared, “corrected” or otherwise bogus forms that improperly report taxable income as zero is illegal. So is an attempt to submit a statement rebutting wages and taxes reported by a third-party payer to the IRS.

Some people also attempt fraud using false Form 1099 refund claims. In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS.

Taxpayers should resist the temptation to participate in any variations of this scheme. The IRS is aware of this scam, and the courts have consistently rejected attempts to use this tax dodge. Perpetrators receive significant penalties, imprisonment or both. Simply filing this type of return may result in a $5,000 penalty.

The IRS sometimes hears about scams from victims worried about losing their federal benefits, such as Social Security, veterans or low-income housing benefits. The loss of benefits comes as a result of false claims being filed with the IRS that provided incorrect income amounts.

Choose Tax Preparers Wisely

Honest tax preparers provide their customers a copy of the tax return they’ve prepared. Scam victims frequently are not given a copy of what was filed. Victims also report that the fraudulent refund is deposited into the scammer’s bank account. The scammers deduct a large “fee” before paying victims, a practice not used by legitimate tax preparers.

The IRS reminds taxpayers that they are legally responsible for what’s on their return even if it was prepared by someone else. Taxpayers who buy into such schemes can end up being penalized for filing false claims or receiving fraudulent refunds.

Taxpayers can help protect themselves by taking some simple steps before choosing a tax preparer. Start with the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications. This tool can help taxpayers find a tax return professional with the right qualifications. The Directory is a searchable and sortable listing of preparers registered with the IRS. It includes the name, city, state and zip code of:

– Attorneys

– CPAs

 – Enrolled Agents

– Enrolled Retirement Plan Agents

– Enrolled Actuaries

– Annual Filing Season Program participants

Also check the preparer’s history. Ask the Better Business Bureau about the preparer. Check 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.

To find more tips on choosing a tax professional, understanding the differences in credentials and qualifications, researching the IRS preparer directory or learning how to submit a complaint regarding a tax return preparer visit www.irs.gov/chooseataxpro.

For more up-to-date coverage from Tax Controversy Sentinel, please subscribe by clicking here.

The Internal Revenue Service today warned taxpayers against scam groups masquerading as charitable organizations, luring people to make donations to groups or causes that don’t actually qualify for a tax deduction. These phony charities, which attempt to attract donations from unsuspecting contributors using a charitable reason and a tax deduction as bait for taxpayers are ranked fifth on the annual IRS “Dirty Dozen” list of tax scams. Perpetrators of illegal scams can face significant penalties and interest and possible criminal prosecution. To help protect taxpayers, the IRS-Criminal Investigation Division works closely with the Department of Justice to shut down scams and prosecute the criminals behind them.

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 is highlighting each of these scams on twelve consecutive days to help raise awareness.

The text of today’s announcement from the IRS follows:

The IRS offers these basic tips to taxpayers making charitable donations:

• Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, that allows people to find legitimate, qualified charities to which donations may be tax-deductible. Legitimate charities will provide their Employer Identification Number (EIN), if requested, which can be used to verify their legitimacy through the IRS Select Check.

• Don’t give out personal financial information, such as Social Security numbers or passwords, to anyone who solicits a contribution. Scam artists may use this information to steal identities and money from victims. Donors often use credit cards to make donations. Be cautious when disclosing credit card numbers to those seeking a donation. Confirm that those soliciting a donation are calling from a legitimate charity.

• Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the donation.

• Consult IRS Publication 526, Charitable Contributions, available on IRS.gov. This free booklet describes the tax rules that apply to making tax-deductible donations. Among other things, it provides complete details on what records to keep to help taxpayers at tax time.

Impersonation of charitable organizations

Another long-standing type of abuse or fraud involves scams that occur in the wake of significant natural disasters.

The IRS encourages taxpayers to donate to recognized charities established to help disaster victims. Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers.

Scam artists can use a variety of tactics following a disaster. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.

Remember, fraudsters may attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources. Bogus websites may solicit funds for disaster victims.

Taxpayers can find legitimate and qualified charities with the Select Check search tool on IRS.gov.

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Continuing its daily “countdown” of the annual “Dirty Dozen” tax schemes, the Internal Revenue Service announced that return preparer fraud is the fourth entry on that esteemed list for 2018. With more than half of the nation’s taxpayers relying on someone else to prepare their tax return, the Internal Revenue Service reminded consumers today to be on the lookout for unscrupulous tax preparers looking to make a fast buck from honest people seeking tax assistance. The IRS recognizes that the majority of tax professionals provide honest, high-quality service. But there are some dishonest preparers who operate each filing season to perpetrate refund fraud, identity theft, and other scams that hurt honest 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 is highlighting each of these scams on twelve consecutive days to help raise awareness.

The text of today’s announcement from the IRS follows:

Tax return preparers are a vital part of the U.S. tax system. About 56 percent of taxpayers use tax professionals to prepare their returns.

Selecting the right tax professional is critically important because taxpayers are ultimately responsible for what they submit on their tax return.

The IRS is also working to protect taxpayers from shady return preparers. The pursuit of illegal scams can lead to significant penalties and interest as well as possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice to shutdown scams and prosecute the criminals behind them.

Choose Return Preparers Carefully

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 may take this step in order to increase their fee. Every year, these types of tax preparers encounter everything from stiff penalties to jail time for defrauding their clients.

Here are a few tips for taxpayers to consider to help avoid a fraudster when choosing a tax preparer:

– Avoid fly-by-night preparers. Make sure the preparer will be available if needed, even after the return is filed. In the event questions come up about a tax return, taxpayers may need to contact the preparer.

– 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. Tax law can be complex. A competent tax professional needs to be up-to-date in these matters.  The IRS website has more information regarding the 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 tax return preparer with the preferred qualifications.

– The Directory is a searchable and sortable listing of tax preparers registered with the IRS. It includes the name, city, state and zip code of:

– Attorneys

– CPAs

– Enrolled Agents

– Enrolled Retirement Plan Agents

– Enrolled Actuaries

– Annual Filing Season Program participants

– Check the preparer’s history. Ask the Better Business Bureau about the preparer. Check 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 when only inquiring about their services and fees. Unfortunately, some preparers have improperly filed returns without the taxpayer’s permission once the records were obtained.

– 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. The IRS has processed more than 1.5 billion e-filed tax returns. It’s the safest and most accurate way to file a return.

– Provide records and receipts. Good preparers will ask to see tax records and receipts. They’ll ask questions to determine the client’s total income, deductions, tax credits and other items. Do not rely on a preparer who is willing to e-file a 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 return. However, non-credentialed preparers who do not participate in the Annual Filing Season Program may only represent clients before the IRS on returns they prepared and signed on or before Dec. 31, 2015.

– Never sign a blank return. Don’t use a tax preparer that asks clients to sign an incomplete or blank tax form.

– Review the tax return before signing. Before a taxpayer signs a return, they should review it and ask questions if something is not clear. Taxpayers should ensure they are comfortable with the accuracy of the return and that the refund goes directly to them – 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. Taxpayers can report abusive tax return preparers and suspected tax fraud 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.

To find other tips about choosing a preparer, understanding the differences in credentials and qualifications, researching the IRS preparer directory and learning how to submit a complaint regarding a tax return preparer, visit www.irs.gov/chooseataxpro.

Remember: Taxpayers are legally responsible for what is on their tax return even if someone else prepares it.

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