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Looking for free tax preparation? IRS provides some tips

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

For lots of people, the option of free tax preparation is an excellent way to go.  There are quite a few providers who will allow you to prepare a simple return for free (more complexity equals more cost, of course).  It’s a good idea to go through the process if you have the aptitude, because it’s helpful to understand the ins and outs of a tax return.  Knowing about how your tax return works can help you to have a better understanding of ways to reduce your taxes in the future.

When using a commercial organization to prepare your return for free, beware of the “add-ons” that make a free process extremely costly.  Among these are – add-on state filing (sometimes more costly than federal preparation!), refund anticipation loans (like a payday loan, only more expensive!), and payment via your refund (another type of refund anticipation loan, with the associated costs).  There’s a reason these organizations offer “free” return filing – by doing so they look like a white knight, and if they can talk you into these add-ons, they’re making a mint off it as well, for very little effort.

On the other hand, maybe you need some assistance with your return.  The IRS provides a couple of programs, VITA (Volunteer Income Tax Assistance) and TCE (Tax Counseling for the Elderly) which provide IRS-trained volunteer help with preparing your return, for no cost to you as long as you qualify.

Recently the IRS issued their Tax Tip 2014-02, which provides their Top 10 Tips for free tax preparation – the actual text of the Tip follows below.

Top 10 Tips about Free Tax Preparation

Each year millions of people have their tax returns prepared for free by volunteers.  These volunteers are part of the IRS Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs.

Here are the top 10 tips the IRS wants you to know about VITA and TCE:

  1. The IRS sponsors both the VITA and TCE programs.  They work with local community groups to both train and certify volunteers.
  2. The VITA program generally offers free tax return preparation and e-filing to people who earn $52,000 or less.
  3. The TCE program offers help mainly to people age 60 or older.  Volunteers specialize in tax issues unique to seniors.  AARP is part of the TCE program and helps taxpayers with low to moderate incomes.
  4. VITA and TCE provide free electronic filing.  An e-filed tax return is the safest and most accurate way to file.  Using e-file combined with direct deposit is the fastest way to get your refund.
  5. Using VITA and TCE may help ensure you get all the tax credits  and deductions you’re able to claim.  For example, credits that you may qualify for include the Earned Income Tax Credit, the Child Tax Credit and the Credit for the Elderly.
  6. Some sites provide bilingual help for people who speak limited English.
  7. VITA provides free tax assistance to military members and their families.  Volunteers help with tax issues related to the military.  These include special rules and tax benefits for those serving in combat zones.
  8. At some VITA sites, you can also prepare your own federal and state tax returns using free web-based software.  This is an option if you don’t need much help or don’t have a home computer.  Volunteers are on site to guide you if you need help.  The self-preparation options generally offer free tax return preparation software and e-filing to people who earn $58,000 or less.
  9. For more than 40 years, the IRS has partnered with nonprofit and community organizations to offer these vital services.  Thousands of VITA and tCE sites around the nation will open in late Jan. and early Feb.
  10. Visit www.IRS.gov to find the nearest VITA site.  Search the word ‘VITA’ and then click on “free Tax Return Preparation for You by Volunteers.”  Site information is also available by calling the IRS at 800-906-9887.  To locate the nearest AARP tax-Aide site, visit www.aarp.org, or call 888-227-7669.

Watch out for scams at tax time

Image courtesy of chanpipat at FreeDigitalPhotos.net

Image courtesy of chanpipat at FreeDigitalPhotos.net

You’ve probably seen news reports about how identity theft is rampant around the time tax returns are being filed.  All sorts of nefarious schemes are out there, via the phone or email.

The IRS recently published their Special Edition Tax Tip 2014-02, which details the warnings from the IRS about scams.  The full text of the Tip is below.

IRS Warns of Tax-time Scams

It’s true: tax scams proliferate during the income tax filing season.  This year’s season opens on Jan. 31.  The IRS provides the following scam warnings so you can protect yourself and avoid becoming a victim of these crimes:

  • Be vigilant of any unexpected communication purportedly from the IRS at the start of tax season.
  • Don’t fall for phone and phishing email scams tha use the IRS as a lure.  Thieves often pose as the IRS using a bogus refund scheme or warnings to pay past-due taxes.
  • The IRS doesn’t initiate contact with with taxpayers by email to request personal or financial information.  This includes any type of e-communication, such as text messages and social media channels.
  • The IRS doesn’t ask for PINs, passwords or similar confidential information for credit card, bank or other accounts.
  • If you get an unexpected email, don’t open any attachments or click on any links contained in the message.  Instead, forward the email to phishing@irs.gov. For more about how to report phishing scams involving the IRS visit the genuine IRS website, www.IRS.gov.

Here are several steps you can take to help protect yourself against scams and identity theft:

  • Don’t carry your Social Security card or any documents that include your Social Security number or Individual Taxpayer Identification Number.
  • Don’t give a business your SSN or ITIN just because they ask.  Give it only when required.
  • Protect your financial information.
  • Check your credit report every 12 months.
  • Secure personal information in your home.
  • Protect your personal computers by using firewalls and anti-spam/virus software, updating security patches and changing passwords for Internet accounts.
  • Don’t’ give personal information over the phone, through the mail or on the Internet unless you have initiated the contact and are sure of the recipient.
  • Be careful when you choose a tax preparer.  Most preparers provide excellent service, but there are a few who are unscrupulous.  Refer to Tips to Help You Choose a Tax Preparer for more details.

For more on this topic, see the special identity theft section on IRS.gov.  Also check out IRS Fact Sheet 2014-1, IRS Combats Identity Theft and Refund Fraud on Many Fronts.

The IRS Released Their “Dirty Dozen” Tax Scams for 2013

The Dirty Dozen

Every year the IRS releases a list of what they refer to as the “Dirty Dozen” tax scams – which are particularly timely to review during tax filing season.  Don’t expect this to be as much fun as watching the original 1967 movie – c’mon, this is the IRS, not Lee Marvin!  However, it’s important to know about these scams because, as the taxpayer, it is you who is ultimately responsible for the information on your tax return – even if you were duped into believing a particular “scam” was legit.

Recently this list was released for 2013, in the IRS’ Special Edition Tax Tip 2013-08.  The actual text of 2013-08 follows:

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.

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.  You may also call the IRS’s Identity Protection Specialized Unit at 800-908-4490.  Find more informaiton 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 RIS, 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 to 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.

For more on the Dirty Dozen, see IRS news release IR-2013-33.

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Knowing which tax form to file

paper tornado base

When filing your own tax returns, it can be confusing to figure our which form you should use.  If you are using tax preparation software, most often this choice is made for you, but if you’re doing it the old-fashioned way, you need to know which form to file.

The IRS recently issued Tax Tip 2013-04, which helps you to choose the correct form to file.  The actual text of the Tip follows (I’ve cleaned up a few formatting issues):

Choosing Which Form to File

IRS e-file makes it easy for taxpayers to choose which tax form to file.  Tax software automatically chooses the best form for your particular situation.  Most people e-file these days, but if you prefer taking pen to paper, the IRS has some tips to help you choose the right form.

Taxpayers who choose to file a paper tax return should know that the IRS no longer mails paper tax packages.  The quickest way to get forms and instructions is by visiting the IRS website at IRS.gov.  You can also order forms and have them mailed to you by calling the RIS forms line at 1-800-TAX-FORM (829-3676).  You may also pick up tax forms from a local IRS office, and some libraries and post offices carry tax forms.

Here are some tips that will help paper tax return filers choose the best tax form for their situation:

You can generally use the 1040EZ if:

  • Your taxable income is below $100,000;
  • Your filing status is single or married filing jointly; and
  • You are not claiming any dependents.

If you can’t use Form 1040EZ, you may qualify to use the 1040A if:

  • Your taxable income is below $100,000;
  • You have capital gain distributions;
  • You claim certain tax credits; and

You claim adjustments to income for IRA contributions and student loan interest.

If you cannot use the 1040EZ or the 1040A, you’ll probably need to file using the 1040.  The reasons you must use the 1040 include:

  • Your taxable income is $100,000 or more;
  • You claim itemized deductions; and
  • You are reporting self-employment income.

IRS Publication 17, Your Federal Income Tax, provides helpful information about which form is best for you.

Access to IRS forms and instructions or information about e-filing, including IRS Free File, is available 24 hours a day, seven days a week on IRS.gov.  Tax products often appear online well before they are available on paper.  You’ll find downloadable tax products on IRS.gov by clicking on the “Forms and Pubs” link on the Home Page.

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Free Income Tax Filing Options

Files

Did you know that you can file your taxes online for free? There are options available for you to file your income tax return for nothing – nada.  There are also options available to get free assistance and use tax preparation software for free, as long as your income is within the limits.

As you research a way to prepare your taxes using one of the no-cost or low-cost methods, keep your guard up.  Beware of Refund Anticipation Loans – the loan that the tax prep company offers you in order to receive your refund (actually only a portion of it).  These loans are tempting, especially if you need the money right away, but the problem is that these loans are nothing more than well-disguised payday loans.

Hopefully you realize that this type of loan is extremely costly in terms of interest rate being charged – effective rates can be as high as 100% or more in many cases.  When e-filing a return, as long as there aren’t any problems with the return, you’ll receive your refund by direct deposit in a relatively short time, 4-6 weeks or less in many cases.  Don’t fall for the easy money offer!

Regarding free filing options, the IRS has recently published a couple of documents describing the process and the availability of these options for you.  The complete text of the two documents is duplicated below:

IRS NEWSWIRE IR-2013-15

Do your Taxes and E-File for Free with Free File

WASHINGTON – All taxpayers have a fast, safe and free option when it comes to preparing their own federal taxes.  It’s called Free File, and it’s available only at IRS.gov.

Free File offers brand-name tax software to people who earned $57,000 or less last year, which is 70 percent of all taxpayers.  For those who earned more, there are free online fillable forms. Both options allow people to file returns electronically and use direct deposit, which is the fastest way to get refunds.

The nations leading tax software companies have partnered with the IRS to make their products available for free through IRS.gov.  Each company sets its own eligibility criteria, generally based on income, state residency, age, military service or eligibility for the Earned Income Tax Credit (EITC).  There is also a software option that is available in Spanish for people who earned $30,000 or less.

Free File does the hard work for you.  The software asks the questions; you provide the answers.  It picks the right forms, does the math and helps you find all the tax benefits for which you are eligible.

All participating Free File partners have been vetted and use the latest in security technology.  Some Free File software providers also offer state tax returns for free or for a fee.

Free File Fillable Forms is the electronic version of IRS paper forms.  It’s best for people experienced and comfortable preparing their own returns on paper.  It does not support state tax returns.

Some Free File software products also are available in select free tax preparation sites operated by Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE).  Taxpayers can use VITA or TCE computers to access Free File, prepare their own state and federal returns with a trained and certified volunteer on stand-by to help and e-file – all for free.

To find a participating site near you, go to IRS.gov and search for “VITA” to find a self-preparation site location near you.

More than 36 million people have used Free File since it started in 2003.  You can explore all your options at www.irs.gov/freefile.

Businesses, organizations, states or local governments may want to promote Free File to their employees, customers or clients with products from the IRS.  Just go to www.freefile.irs.gov/partners to see what you can do to help.  There are printable posters, a tax-day countdown widget for websites and prepared social media posts for your use.

IRS TAX TIP 2013-05

Let Free File Do The Hard Work For You

Taxes can be taxing.  But, you don’t have to be a tax expert to prepare your federal tax return.  Using IRS Free File, you can prepare and e-file your federal taxes on brand-name software for free.  The program is a partnership between the IRS and the Free File Alliance, a group of about 15 private-sector tax software companies.

All Free File software companies use the latest encryption software.  More than 36 million taxpayers used Free File safely and securely since 2003.  Free File is not only safe and secure, but using Free File’s e-file option and direct deposit is the fastest way to get a refund.

Here are four tips about IRS Free File:

  1. Access IRS.gov.  To avoid any charges for preparing or e-filing your federal tax return, you must access Free File through the IRS.gov website.  Once you choose a Free File company, you will be directed to their website to prepare, print and e-file your return.
  2. Taxes simplified.  Free File software’s question and answer format will help you find tax breaks, such as the Earned Income Tax Credit.  The software selects the appropriate tax form and does the calculations for you.
  3. Free options for all.  People who make $57,000 or less, which includes most Americans, can use the Free File brand-name software.  People who earn more can use Free File Fillable Forms, an electronic version of IRS paper forms.
  4. Free extensions.  Taxpayers who cannot complete their tax returns by the April 15 filing deadline can request a six=month extension.  It’s free and easy.  Remember, though, that this is an extension of time to file, not to pay.  If you think you owe, complete the estimated payment section and submit your payment with your extension request to avoid penalties and interest.

Free File.  It’s Fast.  It’s Safe.  It’s Free.  For more information, visit IRS.gov/freefile.

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Choosing a Tax Preparer

Statue of Liberty tax preparer

It’s that time of year again – time to do your income taxes.  While lots of folks will opt for the “box”, using one of the many do-it-yourself options like TurboTax, Tax Cut and others, many folks will choose to go to a professional tax preparer to have their returns prepared.

There are several types of professionals who are qualified to prepare your tax return: Certified Public Accountants (CPAs), attorneys, Enrolled Agents (EAs), and unenrolled tax preparers.  You’re likely familiar with CPAs and attorneys, so I won’t go into explaining them.  Enrolled Agents (EAs) are enrolled with the IRS and empowered to represent taxpayers before the IRS.  This type of professional must pass a rigorous series of exams to be enrolled, and then must complete 72 hours of continuing education every three years to remain enrolled.

CPAs, attorneys and EAs (as well as Enrolled Actuaries) are among a group known as Federally Authorized Tax Practitioners (FATPs).  There are other folks who are authorized to prepare taxes as well – but some of the qualifications are a bit up in the air at the moment.  The Registered Tax Return Preparer (RTRP) designation is to be the new designation for those outside the FATP group, but this designation has recently been challenged in court.  This leaves the unenrolled preparer group with no regulation – essentially it’s the wild, wild west, you don’t know what qualifications your preparer may have.  Sometimes, they even double as a Statue of Liberty <gasp!>.

So what should you look for when choosing a tax preparer?  The IRS recently issued their Tax Tip 2013-07, which lists Ten Tips to Help You Choose a Tax Preparer.  The actual text of the Tip is listed below:

Ten Tips to Help You Choose a Tax Preparer

Many people look for help from professionals when it’s time to file their tax return. If you use a paid preparer to file your federal income tax return this year, the IRS urges you to choose that preparer carefully.  Even if someone else prepares your return, you are legally responsible for what is on it.

Here are ten tips to keep in mind when choosing a tax return preparer:

  1. Check the preparer’s qualifications. All paid tax return preparers are required to have a Preparer Tax Identification Number.  In addition to making sure they have a PTIN, ask if the preparer belongs to a professional organization and attends continuing education classes.
  2. Check on the preparer’s history.  Check with the Better Business Bureau to see if the preparer has a questionable history.  Also check for any disciplinary actions and for the status of their licenses.  For certified public accountants, check with the state boards of accountancy.  For attorneys, check with the state bar associations.  For enrolled agents, check with the IRS Office of Enrollment.
  3. Ask about service fees.  Avoid preparers who base their fee on a percentage of your refund or those who claim they can obtain larger refunds than other preparers can.  Also, always make sure any refund due is sent to you or deposited into an account in your name.  Taxpayers should not deposit their refund into a preparer’s bank account.
  4. Ask to e-file your return.  Make sure your preparer offers IRS e-file.  Any paid preparer who prepares and files more than 10 returns for clients must file the returns electronically, unless the client opts to file a paper return.  IRS has safely and securely processed more than one billion individual tax returns since the debut of electronic filing in 1990.
  5. Make sure the preparer is accessible.  Make sure you will be able to contact the tax preparer after you file your return, even after the April 15 due date.  This may be helpful in the event questions arise about your tax return.
  6. Provide records and receipts.  Reputable preparers will request to see your records and receipts.  They will ask you questions to determine your total income and your qualifications for deductions, credits and other items. Do not use a preparer who is willing to e-file your return by using your latest pay stub before you receive your Form W-2. This is against IRS e-file rules.
  7. Never sign a blank return.  Avoid tax preparers that ask you to sign a blank tax form.
  8. Review the entire return before signing.  Before you sign your tax return, review it and ask questions.  Make sure you understand everything and are comfortable with the accuracy of the return before you sign it.
  9. Make sure the preparer signs and includes their PTIN.  A paid preparer must sign the return and include their PTIN as required by law. The preparer must also give you a copy of the return.
  10. Report abusive tax preparers to the IRS.  You can report abusive tax preparers and suspected tax fraud to the IRS on Form 14157, Complaint: Tax Return Preparer.  If you suspect a return preparer filed or altered a return without your consent, you should also file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit.  Download the forms on the IRS.gov website or order them by mail at 800-TAX-FORM (800-829-3676).
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Penalties for Failure to File or Pay

Exterior of the Internal Revenue Service office

When you don’t file your tax return or if you don’t pay the tax owed on time, the IRS has specific penalties that are applied to your account.  Recently the IRS issued their Tax Tip 2012-74, which lists eight facts about these penalties.  The actual text of the Tax Tip is listed below:

Failure to File of Pay Penalties: Eight Facts

The number of electronic filing and payment options increases every year, which helps reduce your burden and also improves the timeliness and accuracy of tax returns.  When it comes to filing your tax return, however, the law provides that the IRS can assess a penalty if you fail to file, fail to pay, or both.

Here are eight important points about the two different penalties you may face if you file or pay late.

  1. If you do not file by the deadline, you might face a failure-to-file penalty.  If you do not pay by the due date, you could face a failure-to-pay penalty.
  2. The failure-to-file penalty is generally more than the failure-to-pay penalty.  So if you cannot pay all the taxes you owe, you should still file your tax return on time and pay as much as you can, then explore other payment options.  The IRS will work with you.
  3. The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late.  This penalty will not exceed 25 percent of your unpaid taxes.
  4. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
  5. If you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid.  This penalty can be as much as 25 percent of your unpaid taxes.
  6. If you request an extension of time to file by the tax deadline and you paid at least 90 percent of your actual tax liability by the original due date, you will not face a failure-to-pay penalty if the remaining balance is paid by the extended due date.
  7. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.  However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
  8. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.
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The Dirty Dozen Tax Scams for 2012

taxes
taxes (Photo credit: 401K)

Every year around this time, the IRS issues its list of the top tax scams they’ve seen, as a reminder to taxpayers to use caution during tax season to protect themselves against schemes from identity theft to return preparer fraud.

Following is the list of the Dirty Dozen Tax Scams for 2012, taken from IRS publication IR-2012-23:

Identity Theft

Topping this year’s Dirty Dozen list is identity theft.  In response to growing identity theft concerns, the IRS has embarked on a comprehensive strategy that is focused on preventing, detecting and resolving identity theft cases as soon as possible.  In addition to the law-enforcement crackdown, the IRS has stepped up its internal reviews to spot false tax returns before tax refunds are issued as well as working to help victims of the identity theft refund schemes.

Identity theft cases are among the most complex ones the IRS handles, but the agency is committed to working with taxpayers who have become victims of identity theft.

The IRS is increasingly seeing identity thieves looking for ways to use a legitimate taxpayer’s identity and personal information to file a tax return and claim a fraudulent refund.

An IRS notice informing a taxpayer that more than one return was filed in the taxpayer’s name or that the taxpayer received wages from an unknown employer may be the first tip off the individual receives that he or she has been victimized.

The IRS has a robust screening process with measures in place to stop fraudulent returns.  While the IRS is continuing to address tax-related identity theft aggressively, the agency is also seeing an increase in identity crimes, including more complex schemes.  In 2011, the IRS protected more than $1.4 billion of taxpayer funds from getting into the wrong hands due to identity theft.

In January, the IRS announced the results of a massive, national sweep cracking down on suspected identity theft perpetrators as a part of a stepped-up effort against refund fraud and identity theft.  Working with the Justice Department’s Tax Division and local US Attorneys’ offices, the nationwide effort targeted 105 people in 23 states.

Anyone who believes his or her personal information has been stolen and used for tax purposes should immediately contact the IRS Identity Protection Specialized Unit.  For more information, visit the special identity theft page at www.IRS.gov/identitytheft.

Phishing

Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information.  Armed with this information, a criminal can commit identity theft or financial theft.

If you receive an unsolicited email 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), report it by sending it to phishing@irs.gov.

Return Preparer Fraud

About 60 percent of taxpayers will use tax professionals this year to prepare and file their tax returns.  Most return preparers provide honest service to their clients.  But as in any other business, there are also some who prey on unsuspecting taxpayers.

Questionable return preparers have been known to skim off their clients’ refunds, charge inflated fees for return preparation services and attract new clients by promising guaranteed or inflated refunds.  Taxpayers should choose carefully when hiring a tax preparer.  Federal courts have issued hundreds of injunctions ordering individuals to cease preparing returns, and the Department of Justice has pending complaints against many others.

In 2012, every paid preparer needs to have a Preparer Tax Identification Number (PTIN) and enter it on the returns he or she prepares.

Signals to watch for when you are dealing with an unscrupulous return preparer would include that they:

  • Do not sign the return or place a Preparer Tax Identification Number on it.
  • Do not give you a copy of your tax return.
  • Promise larger than normal tax refunds.
  • Charge a percentage of the refund amount as preparation fee.
  • Require you to split the refund to pay the preparation fee.
  • Add forms to the return you have never filed before.
  • Encourage you to place false information on your return, such as false income, expenses and/or credits.
  • Ask you to sign a blank return (added by jb)

For advice on how to find a competent tax professional, see www.irs.gov.

Hiding Income Offshore

Over the years, numerous individuals have been identified as evading US taxes by hiding income in offshore banks, brokerage accounts or nominee entities, using debits cards, credit cards or wire transfers to access the funds.  Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas.  The IRS works closely with the Department of Justice to prosecute tax evasion cases.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirement that need to be fulfilled.  US taxpayers who maintain such accounts and who do not comply with reporting and disclosure requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.

Since 2009, 30,000 individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to bring their money back into the US tax system and resolve their tax obligations.  And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore will become increasingly more difficult.

At the beginning of this year, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs.  The IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion.  This program will be open for an indefinite period until otherwise announced.

The IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95% of the cases from the 2009 program.  On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program.  That number will grow as the IRS processes the 2011 cases.

“Free Money” from the IRS & Tax Scams Involving Social Security

Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches around the country.  These schemes are also often spread by word of mouth as unsuspecting and well-intentioned people tell their friends and relatives.

Scammers prey on low income individuals and the elderly.  They build false hopes and charge people good money for bad advice.  In the end, the victims discover their claims are rejected.  Meanwhile, the promoters are long gone.  The IRS warns all taxpayers to remain vigilant.

There are a number of tax scams involving Social Security.  For example, scammers have been known to lure the unsuspecting with promises of non-existent Social Security refunds or rebates.  In another situation, a taxpayer may really be due a credit or refund but uses inflated information to complete the return.

Beware.  Intentional mistakes of this kind can result in a $5,000 penalty.

False/Inflated Income and Expenses

Including income that was never earned, either as wages or as self-employment income in order to maximize refundable credits, is another popular scam.  Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions.  This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.

Additionally, some taxpayers are filing excessive claims for the fuel tax credit.  Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit.  But other individuals have claimed the tax credit when their occupations or income levels make the claims unreasonable.  Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.

False Form 1099 Refund Claims

In this ongoing scam, the perpetrator files a fake information return, such as a a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return.  In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for US citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS.

Don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns.  If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.

Frivolous Arguments

Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe.  The IRS has a list of frivolous tax arguments that taxpayers should avoid.  These arguments are false and have been thrown out of court.  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, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero.  The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.

Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation.  Taxpayers should resist any temptation to participate in any variations of this scheme.  Filing this type of return may result in a $5,000 penalty.

Abuse of Charitable Organizations and Deductions

IRS examiners continue to uncover the intentional abuse of 501(c)(3) organizations, including arrangements that improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or the income from donated property.  The IRS is investigating schemes that involve the donation of non-cash assets – including situations in which several organizations claim the full value of the same non-cash contribution.  Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at the price set by the donor.  The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new standards for qualified appraisals.

Disguised Corporate Ownership

Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business.

These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering, and financial crimes.  The IRS is working with state authorities to identify these entities and bring the owners into compliance with the law.

Misuse of Trusts

For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts.  While there are legitimate uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes.  Such trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.

IRS personnel have seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses.  As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.

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