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The Basics

The 'dirty dozen' tax scams

Attempts to cheat taxpayers and the IRS -- or both -- aren't limited to tax season. The agency keeps a list of schemes that surface throughout the year.

By Bankrate.com

It's true that tax-oriented scams are at their peak during the January-to-April filing season. But criminals use tax issues -- and taxpayers' concerns about their taxes -- to dupe unsuspecting filers year-round.

Every year, the Internal Revenue Service tracks the multitude of schemes and compiles a list of the 12 most egregious tax-related scams.

Some scam artists come up with patently false schemes to wheedle personal information and money from unsuspecting taxpayers. Others take real tax breaks or portions of legal write-offs and illegally apply them.

Eleven of the scams are making a repeat appearance on this year's warning list, including the criminals' perennial favorite, phishing. Other cons still making the rounds include frivolous tax arguments, retirement scams, misuse of trusts and improper charity deductions. And some folks can't even trust their tax pros, with unscrupulous preparers once again making the annual list.

Each of these tax-oriented cons has serious consequences -- not just for the perpetrators but also for their victims.

If convicted of tax fraud or evasion, scam promoters face tax penalties, interest and criminal prosecution. And taxpayers who bought into a scam, even if they were unwitting victims, also could pay a steep tax price. They can end up owing not only the tax they thought they were avoiding but also penalties and interest.

To help you avoid such unwanted tax consequences, be aware of these "dirty dozen" common and potentially costly tax scams.

1. Phishing

More identity thieves than ever are using tax-themed fake e-mails to try to get personal financial information. Once they do, you can say goodbye to your good financial reputation and hello to a prolonged hassle to clean up the mess. These criminals use the information to empty victims' bank accounts, run up credit card charges and apply for loans or credit in the victims' names.

Some phishing e-mails falsely claim to come from the IRS, usually asking the recipient to send the personal data in a reply e-mail or to click on a link that takes the reader to a fake IRS Web page. Don't fall for this fake bait. The IRS never uses e-mail to contact taxpayers about tax issues. Never respond to such a request, and never follow any links in suspect e-mails. The only official IRS Web site is IRS.gov, and your safest move is to go there directly if you have tax questions.

If you get such a solicitation, forward the e-mail to the IRS at phishing@irs.gov. And if you ever have any doubt as to whether any IRS contact is authentic, call 1-800-829-1040 to confirm it.

2. False or misleading forms

This is the lone new scam on the 2009 list. In these cases, scam artists file false or misleading returns to claim refunds to which they are not entitled.

One popular ploy is the filing of Form 1099-OID (.pdf file), by which false withholding credits are used to legitimize erroneous refund claims. Interest that you receive or that is credited to an account you own is taxable income and must be reported on your tax return. One type of such interest is from a bond, note or other long-term debt instrument that was originally issued for a lower price than its redemption price at maturity. This original issue discount is a form of such taxable interest. By crediting this false interest to the taxpayer, the scammer then claims an illegal refund using the falsely reported income.

This scam has evolved from a phony "straw man" bank account scam. In that earlier scheme, a fake account was created for a taxpayer, who then produced an informational return contending that the account had been used to pay for goods and services. The scammer then falsely claimed the corresponding amount as withholding, which they then filed for in order to get the money "back" as a refund.

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3. Frivolous tax arguments

This group of tax-evasion techniques is probably the most notorious. Over the years, tax-avoidance promoters have advocated numerous false claims as to why individuals don't have to file tax returns. They include the perennial claims that the 16th Amendment concerning congressional power to lay and collect income taxes was never ratified and that wages are not income, and newer arguments involving a misinterpretation of the Ninth Amendment regarding objections to military spending and claims that taxes are owed only by people with fiduciary relationships to the United States.

Taxpayers do have the right to contest their tax liabilities in court, the IRS says, but no one has the right to disobey the law that allows the government to collect the taxes. The IRS regularly updates an online list of frivolous tax arguments. If a taxpayer files a tax return or makes a submission based on one of these positions, that person is subject to a $5,000 penalty.

4. Phony fuel tax credits

The credits can be a legitimate tax break, claimed by taxpayers such as farmers, who use fuel for off-highway business purposes. But in this scam, the IRS has received claims it says are unreasonable.

Some filers, whose occupation or income level makes the claim suspect, are claiming the tax credit for nontaxable uses of fuel. This is one of the frivolous claims that can bring a $5,000 penalty.

Continued: Hiding income offshore

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