And The 2011 Award for The IRS’ Top Dirty Dozen Tax Scams Goes To…

As we approach the April 18th federal tax deadline, the IRS is reminding taxpayers to be wary of the “2011 Dirty Dozen Tax Scams“.  While the IRS, along with the Justice Department, seeks to pursue, shut-down and prosecute perpetrators of illegal scams, even taxpayers who are tricked into these scams aren’t off the hook, and could end up huge tax bills, substantial penalties and interest.  Receiving this year’s IRS “award” for dirty tax scams are:


Hiding Income Offshore:  The IRS’ focus is on taxpayers who attempt to avoid or evade U.S. income tax by hiding income in offshore banks, brokerage accounts, or through other means, as well as on the unscrupulous promoters or “professionals” who facilitate these tax evasion schemes.   While having a legitimate offshore account isn’t illegal, taxpayers may be required to report these accounts, and income they generate, on their U.S. tax returns. As part of the IRS’ effort to identify offshore funds and help taxpayers with undisclosed offshore income to get current in their tax obligations, the IRS is holding a voluntary disclosure initiative through August 31, 2011.  (For more on the IRS’ current voluntary disclosure initiative see the IRS’ 2/8/11 Voluntary Disclosure Article)


Identity Theft and Phishing:  When it comes to taxes, victims of identity theft may belatedly find that their personal information has been used to file fraudulent tax returns or collect refunds generally without their knowledge.  Taxpayers who believe their personal information has been stolen and used for tax purposes, should contact the IRS Identity Protection Specialized Unit at 1-800-908-4490. 

In an effort to protect taxpayers from tax related identity theft, the IRS has repeatedly warned of phishing schemes involving scammers and cybercriminals tricking unsuspecting taxpayers into providing personal or financial information by posing as the IRS.  (See my 12/31/10 post, Taxpayers Beware: IRS Warns of Phishing Scams Involving Bogus IRS Communications)  Not surprisingly, IRS impersonation schemes flourish during the tax season.  Cybercriminals know all too well that communications to taxpayers promising an unrealized tax refund, that an error has been made on their recently filed return, or that someone has been tampering with their financial accounts, will get a taxpayers attention.  (Also see “Tax Day 2011: Four ways to protect your tax returns from data thieves“)  Suspicious e-mails or an “IRS” Web address that does not begin with should be forwarded to the IRS at


Return Preparer Fraud:  While the majority of tax return preparers are honest professionals, some are dishonest and engage in reckless and fraudulent activity, such as skimming a portion of client’s refunds, charging inflated fees or making false promises.  The IRS warns that taxpayers should choose carefully when hiring a tax preparer.  In its efforts to provide greater oversight of the tax preparation industry, the IRS now requires compensated tax preparers to have a Preparer Tax Identification Number (“PTIN”), and will soon require tax preparers to pass a competency test and meet continuing education requirements.  (See my 12/31/10 post, “Does Your Tax Preparer Have a PTIN? New IRS Rules Apply to Preparers of 2010 Returns”) 


Filing False or Misleading Forms:  This dirty scam often involves using information from family or friends to file false or misleading returns with the goal of obtaining refunds to which the scammers aren’t entitled.  Taxpayers are warned to be wary of tax preparers, “friends”, or other “promoters” who encourage them to claim deductions or credits that taxpayers suspect aren’t legitimate or to willingly allow others to use their information to file false returns.   The IRS warns that it takes refund fraud seriously, and participating in these scams could subject taxpayers to financial penalties, and possibly criminal prosecution.


Frivolous Arguments:  Like the filing of false or misleading forms, “promoters” of frivolous scams encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous legal positions, arguments that the IRS warns are false and have been thrown out of court, which taxpayers should avoid.


Nontaxable Social Security Benefits With Exaggerated Withholding Credit:  This scam involves reporting nontaxable Social Security Benefits with excessive withholding.  Often both the withholding amount and the reported income are incorrect.  Like other scams, taxpayers who make these false filings could be subject to a $5,000 penalty.


Abuse of Charitable Organizations and Deductions:  These scams include arrangements to improperly shield income or assets from taxation, including attempts by donors to maintain control over donated assets or the income from donated property, the donation of highly valued non-cash assets, or where the charitable organization promises the donor the right to repurchase the contributed items at a later date.  


Abusive Retirement Plans:  Scams in this area include attempts by taxpayers to circumvent IRA limits and failing to report early distribution transactions. Taxpayers should be wary of advisers who encourage them circumvent annual contribution limits by shifting appreciated assets at less than fair market value into IRAs or companies owned by their IRAs.


Disguised Corporate Ownership:  The focus here is on the formation of legal entities specifically for the purpose of facilitating the underreporting of income, taking of fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes and even terrorist financing.


Zero Wages:  Another scam which focuses on illegally reducing the amount of tax due, often to zero, involves the filing of a phony wage-or-income-related informational return, such as by filing a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 or by a taxpayer falsely filing a statement rebutting wages and taxes reported by a payer to the IRS. Taxpayers should resist any temptation to participate in any of the variations of this scam as these illegal actions could result in a $5,000 penalty.


Misuse of Trusts:  Improperly using private annuity and foreign trusts to shift income and deduct personal expenses is yet another scam that may be viewed as a means to illegally reduce taxes due. While there are many legitimate, valid uses of trusts in tax and estate planning, taxpayers should be wary of promoters of highly questionable trusts transactions and should always seek the advice of a trusted professional before entering any trust arrangement.


Fuel Tax Credit Scams:  The final dirty dozen scam involves taxpayers claiming the fuels tax credit for nontaxable uses, especially when their occupation or income level make the claim unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.


Taxpayers who suspect fraud or an illegal scam can report the alleged fraudulent activity to the IRS on Form 3949-A, Information Referral, or in a letter to the IRS, Fresno, California, 93888. Although a taxpayer’s letter should be as detailed as possible, a taxpayer’s identity can be kept confidential.

Whistleblowers can also report fraud allegations to the IRS, and may be eligible for an award by filing Form 211 Application for Award for Original Information. Whistleblowers should follow the procedures in Notice 2008-4, Claims Submitted to the IRS Whistleblower Office under Section 7623.  (And on a final note, here’s one last interesting article that highlights the IRS’ focus on identifying illegal and fraudulent schemes and rewarding those who report them, “CPA Receives $4.5M IRS Whistleblower Award”)




Sylvia F. Dion, MPA, CPA is a tax consultant based near Boston, Massachusetts.  She specializes in provided State and Local Tax consulting services to businesses and is the creator, author and publisher of The State and Local Tax “Buzz” blog.  Follow her on twitter at  She can also be reached at



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