Protect Yourself from the Dirty Dozen Tax Scams

The IRS’s annual ‘Dirty Dozen’ list includes common tax scams that often peak during the tax filing season. The IRS recommends that taxpayers be aware so they can protect themselves against claims that sound too good to be true. Taxpayers who buy into illegal tax scams can end up facing significant penalties and interest and even criminal prosecution.

The tax scams that made the Dirty Dozen list this filing season are:

Identity Theft.  Tax fraud through the use of identity theft tops this year’s Dirty Dozen list. Combating identity theft and refund fraud is a top priority for the IRS. The IRS’s ID theft strategy focuses on prevention, detection and victim assistance. During 2012, the IRS protected $20 billion of fraudulent refunds, including those related to identity theft. This compares to $14 billion in 2011. Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should immediately contact the IRS so the agency can take action to secure their tax account. If you have received a notice from the IRS, call the phone number on the notice. You may also call the IRS’s Identity Protection Specialized Unit at 800-908-4490. Find more information on the identity protection page on IRS.gov.

Phishing.  Phishing typically involves an unsolicited email or a fake website that seems legitimate but lures victims into providing personal and financial information. Once scammers obtain that information, they can commit identity theft or financial theft. The IRS 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. If you receive an unsolicited email that appears to be from the IRS, send it to phishing@irs.gov.

Return Preparer Fraud.  Although most return preparers are reputable and provide good service, you should choose carefully when hiring someone to prepare your tax return. Only use a preparer who signs the return they prepare for you and enters their IRS Preparer Tax Identification Number (PTIN).  For tips about choosing a preparer, visit www.irs.gov/chooseataxpro.

Hiding Income Offshore.  One form of tax evasion is hiding income in offshore accounts. This includes using debit cards, credit cards or wire transfers to access those funds. While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements taxpayers need to fulfill. Failing to comply can lead to penalties or criminal prosecution. Visit IRS.gov for more information on the Voluntary Disclosure Program.

“Free Money” from the IRS & Tax Scams Involving Social Security.  Beware of scammers who prey on people with low income, the elderly and church members around the country. Scammers use flyers and ads with bogus promises of refunds that don’t exist. The schemes target people who have little or no income and normally don’t have to file a tax return. In some cases, a victim may be due a legitimate tax credit or refund but scammers fraudulently inflate income or use other false information to file a return to obtain a larger refund. By the time people find out the IRS has rejected their claim, the promoters are long gone.

Impersonation of Charitable Organizations. Following major disasters, it’s common for scam artists to impersonate charities to get money or personal information from well-intentioned people. 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. Taxpayers need to be sure they donate to recognized charities.

False/Inflated Income and Expenses.  Falsely claiming income you did not earn or expenses you did not pay in order to get larger refundable tax credits is tax fraud. This includes false claims for the Earned Income Tax Credit. In many cases the taxpayer ends up repaying the refund, including penalties and interest. In some cases the taxpayer faces criminal prosecution. In one particular scam, taxpayers file excessive claims for the fuel tax credit. Fraud involving the fuel tax credit is a frivolous claim and can result in a penalty of $5,000.

False Form 1099 Refund Claims.  In this scam, the perpetrator files a fake information return, such as a Form 1099-OID, to justify a false refund claim.

Frivolous Arguments.  Promoters of frivolous schemes advise taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. These are false arguments that the courts have consistently thrown out. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.

Falsely Claiming Zero Wages.  Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, scammers use a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 to improperly reduce taxable income to zero. Filing this type of return can result in a $5,000 penalty.

Disguised Corporate Ownership.  Scammers improperly use third parties form corporations that hide the true ownership of the business. They help dishonest individuals underreport income, claim fake deductions and avoid filing tax returns. They also facilitate money laundering and other financial crimes.

Misuse of Trusts.  There are legitimate uses of trusts in tax and estate planning. But some questionable transactions promise to reduce the amount of income that is subject to tax, offer deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the promised tax benefits. They primarily help avoid taxes and hide assets from creditors, including the IRS.

 

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IRS Increases Examinations of High-Income Taxpayers

The Internal Revenue Service has stepped up its examinations in the past year of taxpayers with high adjusted gross incomes, according to newly released IRS figures.

 

The IRS released its 2012 IRS Data Book on Monday, providing a snapshot of agency activities for the fiscal year. The report describes activities conducted by the IRS from Oct. 1, 2011, to Sept. 30, 2012, and includes information about returns filed, taxes collected, enforcement, taxpayer assistance and the IRS budget and workforce, among others.

The IRS said it examined just under 1 percent of all tax returns filed and about 1 percent of all individual income tax returns during fiscal year 2012. “Overall, in FY 2012, individual income tax returns in higher AGI classes were more likely to be examined than returns in lower AGI classes,” said the IRS.

The IRS examined about 12.1 percent of the 337,477 tax returns reporting income of $1 million or more, compared to 2.8 percent of those reporting at least $200,000 and under $1 million, and 0.4 percent of those reporting income under $200,000 who didn’t file a Schedule C, E, F or Schedule 2106, and 1.1 percent of those with income under $200,000 and filing Schedule E or Form 2106. Of the 1.5 million individual tax returns examined, nearly 54,000 resulted in additional refunds. In addition, the IRS examined 1.6 percent of corporation income tax returns, excluding S corporation returns, in fiscal 2012.

During fiscal year 2012, the IRS collected almost $2.5 trillion in federal revenue and processed 237 million returns, of which almost 145 million were filed electronically. Out of the 146 million individual income tax returns filed, almost 81 percent were e-filed. More than 120 million individual income tax return filers received a tax refund, which totaled almost $322.7 billion. On average, the IRS spent 48 cents to collect $100 in tax revenue during the fiscal year, the lowest cost since 2008. The IRS also provided taxpayer assistance through 372 million visits to IRS.gov and assisted almost 97 million taxpayers through its toll-free telephone helpline or at walk-in sites.

“In 2012, the IRS responded to many challenging situations, providing assistance to taxpayers in a variety of circumstances,” wrote IRS Acting Commissioner Steven T. Miller, summing up the year. “For example, we gave filing and payment relief to victims of Hurricane Isaac and later Hurricane Sandy. We also continued to add flexibilities to our collection program under the Fresh Start initiative, to help taxpayers facing economic hardships.”

However, Miller acknowledged that one of the biggest challenges confronting the IRS today is tax refund fraud caused by identity theft. “The IRS has more than doubled the number of staff dedicated to preventing refund fraud and assisting taxpayers victimized by identity theft, with more than 3,000 employees working in this area,” he noted. “As a result of these increased efforts, the IRS during FY 2012 was able to prevent the issuance of more than 3 million fraudulent refunds worth more than $20 billion. Despite these efforts, much more work remains on identity theft as well as on overall refund fraud.”

Miller also noted that the IRS made significant progress last year on international enforcement, specifically in its efforts to combat the practice of illegally hiding assets and income in offshore accounts. “We have continued our two-pronged approach: offering a voluntary disclosure program for those who want to come in and get right with the government, while at the same time pursuing tax evaders and the promoters and banks assisting them,” he said.

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Time is Running Short to Claim Your 2009 Refund

If you haven’t filed your 2009 federal tax return, you may still have time to claim your tax refund. The IRS has $917 million in unclaimed refunds from an estimated 984,000 tax returns that people didn’t file for the 2009 tax year. The IRS estimates that half the potential refunds for 2009 are more than $500.

Here are some things the IRS wants you to know about unclaimed refunds:

1. Not required to file.  You may not have filed a 2009 tax return because you didn’t earn enough income to have a filing requirement. If you had taxes withheld from your wages or made quarterly estimated payments, you can still file a return and claim your refund.

2. Three-year window.  You have three years to claim a refund. If you don’t claim your refund within three years, the money becomes property of the U.S. Treasury. For 2009 returns, the window closes on April 15, 2013. You must properly address, postmark and mail your return by that date. There is no penalty for filing a late return if you are due a refund.

3. Don’t miss the EITC.  By not filing a return, you may miss an important credit — the Earned Income Tax Credit. For 2009, the credit is worth as much as $5,657. The EITC can put extra money in the pockets of individuals and families with low and moderate incomes. If you are eligible for the EITC, you must file a federal income tax return to claim the credit. This is true even if you are not otherwise required to file.

4. Some refunds applied.  The IRS may hold your refund if you have not filed tax returns for 2010 and 2011. The law allows the use of your federal tax refund to pay any amounts still owed to the IRS or your state tax agency. If you have unpaid debts, such as overdue child support or student loans, your refund may be applied to pay that debt.

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Home Office Deduction: a Tax Break for Those Who Work from Home

If you use part of your home for your business, you may qualify to deduct expenses for the business use of your home. Here are six facts from the IRS to help you determine if you qualify for the home office deduction.

1. Generally, in order to claim a deduction for a home office, you must use a part of your home exclusively and regularly for business purposes. In addition, the part of your home that you use for business purposes must also be:

• your principal place of business, or

• a place where you meet with patients, clients or customers in the normal course of your business, or

• a separate structure not attached to your home. Examples might include a studio, workshop, garage or barn. In this case, the structure does not have to be your principal place of business or a place where you meet patients, clients or customers.

2. You do not have to meet the exclusive use test if you use part of your home to store inventory or product samples. The exclusive use test also does not apply if you use part of your home as a daycare facility.

3. The home office deduction may include part of certain costs that you paid for having a home. For example, a part of the rent or allowable mortgage interest, real estate taxes and utilities could qualify. The amount you can deduct usually depends on the percentage of the home used for business.

4. The deduction for some expenses is limited if your gross income from the business use of your home is less than your total business expenses.

5. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home, to figure the amount you can deduct. Report your deduction on Schedule C, Profit or Loss From Business.

6. If you are an employee, you must meet additional rules to claim the deduction. For example, in addition to the above tests, your business use must also be for your employer’s convenience.

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Tax Rules on Early Withdrawals from Retirement Plans

Taking money out early from your retirement plan can cost you an extra 10 percent in taxes. Here are five things you should know about early withdrawals from retirement plans.

1. An early withdrawal normally means taking money from your plan, such as a 401(k), before you reach age 59½.

2. You must report the amount you withdrew from your retirement plan to the IRS. You may have to pay an additional 10 percent tax on your withdrawal.

3. The additional 10 percent tax normally does not apply to nontaxable withdrawals. Nontaxable withdrawals include withdrawals of your cost in participating in the plan. Your cost includes contributions that you paid tax on before you put them into the plan.

4. If you transfer a withdrawal from one qualified retirement plan to another within 60 days, the transfer is a rollover. Rollovers are not subject to income tax. The added 10 percent tax also does not apply to a rollover.

5. There are several other exceptions to the additional 10 percent tax. These include withdrawals if you have certain medical expenses or if you are disabled. Some of the exceptions for retirement plans are different from the rules for IRAs.

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Ex-IRS Official Pleads Guilty to Disclosing Tax Audit Information to Future Employer

A former Internal Revenue Service official has pleaded guilty to violating a criminal conflict of interest law and illegally disclosing confidential audit information while he was an IRS employee.

Dennis Lerner, 60, a former international examiner in the IRS’s New York office, pleaded guilty Monday in a Manhattan federal court before U.S. District Judge John F. Keenan. He was arrested last September and charged with illegally exposing the identity of a whistleblower who reported tax compliance problems by an international bank to the IRS (see Former IRS Official Charged with Exposing Whistleblower’s Identity).

Lerner worked as an international examiner from June 2010 to August 2011, and for several months leading up to his resignation from the IRS, one of his chief responsibilities involved conducting an audit of the German bank Commerzbank related to approximately $1 billion in allegedly unreported income. Shortly before resigning, Lerner led negotiations on behalf of the IRS that resulted in a proposed $210 million settlement between the bank and the IRS. The settlement was still pending final approval at the time of his departure.

Unbeknownst to his colleagues and supervisors, Lerner applied for, interviewed for, and accepted the position of tax director at the bank at the same time he was representing the IRS in settlement discussions with the bank, according to prosecutors.

He also sent multiple emails to a correspondent in which he expressed both his dissatisfaction with his job at the IRS and his hope that he would secure a job with the bank. He never notified the IRS that he was trying to get a job with the bank. After leaving for a job at the bank, he repeatedly spoke with former co-workers at the IRS to influence the pending settlement between the IRS and the bank.

“Dennis Lerner betrayed the trust put in him as a public servant by parlaying his position at the IRS into a high-powered job at a bank he was auditing through a scheme that may now land him in prison,” Manhattan U.S. Attorney Preet Bharara said in a statement. “We will not tolerate corrupt government employees and will prosecute and punish them to the full extent of the law.”

Lerner also improperly disclosed tax return information during the time he worked as an IRS international examiner, revealing the identity of a bank he was auditing to an individual who was not employed by the IRS, according to prosecutors. He faces up to 10 years in prison and is scheduled to be sentenced in July.

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IRS Grants Taxpayers Late-Payment Penalty Relief Due to Delayed Forms

The Internal Revenue Service is giving relief from late-payment tax penalties to individuals and businesses that request a tax-filing extension because they are attaching to their returns any of the forms that couldn’t be filed until after January.

The relief applies to the late-payment penalty, normally 0.5 percent per month, charged on tax payments made after the regular filing deadline. This relief applies to any of the forms delayed until February or March, primarily due to the January enactment of the American Taxpayer Relief Act.

Taxpayers using forms claiming such tax benefits as depreciation deductions and a variety of business credits qualify for this relief. A complete list of eligible forms can be found in Notice 2013-24, posted today on IRS.gov.

Individuals and businesses qualify for this relief if they properly request an extension to file their 2012 returns. Eligible taxpayers need not make any special notation on their extension request, but as usual, they must properly estimate their expected tax liability and pay the estimated amount by the original due date of the return.

The return must be filed and payment for any additional amount due must be made by the extended due date. Interest still applies to any tax payment made after the original deadline.

Further details on the tax relief, including instructions for responding to penalty notices, is available in Notice 2013-24.

The affected forms include:

•    Form 3800, General Business Credit
•    Form 4136, Credit for Federal Tax Paid on Fuels
•    Form 4562, Depreciation and Amortization (Including Information on Listed
•    Property)
•    Form 5074, Allocation of Individual Income Tax to Guam or the Commonwealth
•    of the Northern Mariana Islands
•    Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign
•    Corporations
•    Form 5695, Residential Energy Credits
•    Form 5735, American Samoa Economic Development Credit
•    Form 5884, Work Opportunity Credit
•    Form 6478, Alcohol and Cellulosic Biofuels Credit
•    Form 6765, Credit for Increasing Research Activities
•    Form 8396, Mortgage Interest Credit
•    Form 8582, Passive Activity Loss Limitations
•    Form 8820, Orphan Drug Credit
•    Form 8834, Qualified Plug-in Electric and Electric Vehicle Credit
•    Form 8839, Qualified Adoption Expenses
•    Form 8844, Empowerment Zone and Renewal Community Employment Credit
•    Form 8845, Indian Employment Credit
•    Form 8859, District of Columbia First-Time Homebuyer Credit
•    Form 8863, Education Credits (American Opportunity and Lifetime Learning
•    Credits)
•    Form 8864, Biodiesel and Renewable Diesel Fuels Credit
•    Form 8874, New Markets Credits
•    Form 8900, Qualified Railroad Track Maintenance Credit
•    Form 8903, Domestic Production Activities Deduction
•    Form 8908, Energy Efficient Home Credit
•    Form 8909, Energy Efficient Appliance Credit
•    Form 8910, Alternative Motor Vehicle Credit
•    Form 8911, Alternative Fuel Vehicle Refueling Property Credit
•    Form 8912, Credit to Holders of Tax Credit Bonds
•    Form 8923, Mine Rescue Team Training Credit
•    Form 8932, Credit for Employer Differential Wage Payments
•    Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit

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Itemizing vs. Standard Deduction: Six Facts to Help You Choose

When you file a tax return, you usually have a choice to make: whether to itemize deductions or take the standard deduction. You should compare both methods and use the one that gives you the greater tax benefit.

The IRS offers these six facts to help you choose.

1. Figure your itemized deductions.  Add up the cost of items you paid for during the year that you might be able to deduct. Expenses could include home mortgage interest, state income taxes or sales taxes (but not both), real estate and personal property taxes, and gifts to charities. They may also include large casualty or theft losses or large medical and dental expenses that insurance did not cover. Unreimbursed employee business expenses may also be deductible.

2. Know your standard deduction.  If you do not itemize, your basic standard deduction amount depends on your filing status. For 2012, the basic amounts are:

• Single = $5,950
• Married Filing Jointly  = $11,900
• Head of Household = $8,700
• Married Filing Separately = $5,950
• Qualifying Widow(er) = $11,900

3. Apply other rules in some cases. Your standard deduction is higher if you are 65 or older or blind. Other rules apply if someone else can claim you as a dependent on his or her tax return. To figure your standard deduction in these cases, use the worksheet in the instructions for Form 1040, U.S. Individual Income Tax Return.

4. Check for the exceptions.  Some people do not qualify for the standard deduction and should itemize. This includes married people who file a separate return and their spouse itemizes deductions. See the Form 1040 instructions for the rules about who may not claim a standard deduction.

5. Choose the best method.  Compare your itemized and standard deduction amounts. You should file using the method with the larger amount.

6. File the right forms.  To itemize your deductions, use Form 1040, and Schedule A, Itemized Deductions. You can take the standard deduction on  Forms 1040, 1040A or 1040EZ.

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Charities Worried about Cap on Tax Deductions

A coalition of charities has expressed concerns about a Senate budget proposal that could potentially place a limit on charitable deductions.

 

The group, known as the Charitable Giving Coalition, includes United Way Worldwide, the Salvation Army, Catholic Charities USA, the American Institute for Cancer Research and other organizations. Representatives of several of the groups testified at a congressional hearing last month urging lawmakers not to cap charitable deductions for wealthy taxpayers (see Congress Considers Cap on Charitable Deductions). They are now concerned about a budget proposal approved Thursday by Democrats on the Senate Budget Committee that would raise $975 billion in revenue over 10 years by reducing unspecified tax breaks for the wealthiest taxpayers and largest corporations.

The coalition of charitable groups argued Thursday, however, that any limits to the charitable tax deduction would have profound consequences for communities served by the philanthropic sector nationwide. It noted that while the Senate plan proposes limits or caps on the value of itemized tax deductions, which includes the charitable tax deduction, the Pease provision approved as part of the “fiscal cliff” agreement already limits deductions for certain taxpayers.

“The Coalition is alarmed that the Senate’s proposed budget plan does not protect the unique value of charitable deduction, especially now as communities continue to struggle to overcome a bruising recession,” said Association of Gospel Rescue Missions president John Ashmen in a statement. “We simply can’t afford to chip away at incentives that encourage charitable giving. Doing so will have profound consequences for our communities and vital efforts that heal, educate, innovate and more. “Let’s be clear. The millions of disadvantaged people who need the most support—not donors— will be hit hardest by limits or caps to the charitable deduction. We would put at risk billions of dollars in private donations and just transfer to the government funds that would otherwise go to charity. Elected leaders certainly have to make tough decisions to address our fiscal challenges, but limiting the charitable deduction is no solution. We are determined to make sure lawmakers clearly understand that this century-old tax incentive is unique. It encourages giving, provides no financial benefit to the donor and helps meet critical community needs. The nation’s budget crisis is undeniable, but that is exactly why we should be creating more ways to encourage giving—not less.”

 

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Depreciation Limits for Cars

The IRS has released Revenue Procedure 2013-21, which provides the depreciation deduction limitations for owners of passenger automobiles (including trucks and vans) first placed in service during calendar year 2013 and the amount to be included in income by lessees of passenger automobiles first leased during calendar year 2013.

Depreciation limitations for passenger automobiles that are not trucks or vans placed in service in calendar year 2013 for which the Section 168(k) additional first-year depreciation deduction applies are $11,160 for the first tax year, $5,100 for the second tax year, $3,050 for the third tax year, and $1,875 for each succeeding year.

These depreciation deduction limitations and income inclusion amounts are updated annually pursuant to Section 280F to reflect the automobile price inflation adjustments.

Procedure 2013-21 will be published in Internal Revenue Bulletin 2013-12 on March 18.

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