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Tuesday, March 6, 2012

IRS's "Dirty Dozen Tax Scams for 2012"

Tax time is an extremely emotion-laden month, whether you get a refund or a bill.  Emotionality and rationality tend to be mutually exclusive, don't they?  As a result, we risk becoming easy fodder for bad ideas and the scam artists who promote them.  To Preserve your Wealth, avoiding mistakes is more important than finding the next hot investment.
IRS helpfully publishes their annual Dirty Dozen scam list which I will summarize for you below.  If you have more time, the link is well worth exploring.  Here they are:
  1. Identity Theft- This is one good reason to file as early as possible.  Gary.  It is very easy for a thief to file a false return with made-up W-2s & 1099s claiming income tax withholding that never happened.  If you've already filed, IRS will notify you that a 2nd return has been filed before issuing another refund.
  2. Phishing- For you linguists, according to Wikipedia, "phishing" probably originated with "phreaking" which involved various tricks to steal free phone calls ("free" + "phone" = "phreak".  I would have said, "phrone"), including using Cap'n Crunch whistles.  Phishing scammers will bait you with a phony email that appears to have come from your bank or some official agency, asking you to confirm your social security number or other private info.  Neither IRS nor banks do this by email!  By the way, when you're done reading this, please send me all your passwords and PINs.
  3. Tax Preparer Fraud-  Most preparers are honest and competent.  The main danger sign is if the preparer fails to sign your return and/or doesn't have a Preparer Tax ID number on the return.  Both are now required in 2012.  And never consent to share any of your refund with the preparer.  Finally, as a planner and not a critic, tax return preparers want to be your hero this year by maximizing your refund or minimizing your tax.  But often this results in higher total taxes over your lifetime.  For example, Traditional IRA contributions may be inappropriate if you expect to be in higher tax brackets in coming years (that is, all of us).  Have an experienced long-term planner (uh, ahem, like me) do some projections for you.
  4. Hiding Income Offshore- This only works if you are in the Fortune 500 with Wall Street law firms on retainer.  It does not work for real people.  One website estimates there are over 36,000 corporations registered in the Cayman Islands alone.  That's one & a half customers per corporation.  Wow, now that's customer service.
  5. "Free Money" from IRS or Social Security scams- Happening more frequently in small church congregations of low income or elderly folks, the first clue here should be, "Why is this person talking about this in my church?"  The scammers file false returns for a large fee, the refund arrives, and then later so does the audit letter.  As far as I'm concerned, these are the lowest scumbags on the totem pole.
  6. False income and Expenses-  You're thinking, hey wait a minute, why would I file extra income??  To get refundable credits such as the EITC or the American Opportunity Tax Credit.
  7. False Form 1099 Refund Claims- If you didn't get the 1099 yourself, don't let anyone make one up for you.  And certainly don't let them use your info. to file a return for others.
  8. Frivolous Arguments- Here's a list:  http://www.irs.gov/taxpros/article/0,,id=159853,00.html  If you recognize any of them in a pitch made to you by a "tax expert", run in the opposite direction.
  9. Falsely Claiming Zero Wages- Again, for a hefty fee, scammers will indeed get you a refund.  Consider it a temporary loan with a $5000 penalty.
  10. Abuse of Charitable Organizations and Deductions- self evident.
  11. Disguised Corporate Ownership- Again.  And again.  This only works if you are a huge multinational corporation, enjoying special tax laws you wrote yourself.  (IRS never pays attention to the tax laws I write for them.)  If someone says little ol' you can do the same thing, same strategy: run in the opposite direction.
  12. Misuse of Trusts- If it has not at least been reviewed by a local attorney that you know and trust, the trust probably will not deliver on the scammer's promise.
 I've said it many times before, that a system built to be totally abuse-proof will in itself become abusive.  Enforcement of the law is important.  All these government intrusions into our lives are here because many of us demand them in order for the playing field to be level.  Unfortunately, it has become abusive to the powerless and subservient to the powerful, thereby largely failing in its purpose.

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