6. Abusive retirement plansRetirement accounts that offer tax advantages are prime scam targets. The IRS continues to uncover abuses in all types of retirement plan arrangements, including Roth IRAs. For instance, the IRS is looking for transactions that taxpayers are using to avoid the limitations on Roth contributions, as well as early-distribution transactions that are not properly reported.
Taxpayers should be wary of advisers who encourage them to shift appreciated assets into Roth IRAs, or companies owned by their Roth IRAs at less than fair market value. In one variation of the scheme, a promoter has the taxpayer move a highly appreciated asset into a Roth IRA at cost value, which is below annual contribution limits even though the fair market value far exceeds the amount allowed. The IRS also reports the use of limited liability companies to engage in activity that is considered prohibited.
7. Zero wage claimsThis scam has been around for years and is still going strong. Its hook: No income means no taxes due. So how do you get to the zero income level? By attaching to your return either a Form 4852 (Substitute Form W-2) or a "corrected" Form 1099 that shows little or no wages or other income. Often, the taxpayer includes a statement that the information is in rebuttal to prior data the IRS received. In support of these purported corrections, the filer might cite "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.
Sure, every year taxpayers don't get their W-2 statements from employers and have to submit replacement forms. Similarly, companies often send their workers corrected year-end statements when original information is wrong. But you can be very sure that the IRS will look carefully at any new statements and try to track down substantiation for the changes. Try to slip bogus documents past the agency, and you'll hear from an auditor.
8. False requests for abatementThis scam uses a real tax document, Form 843, but rests on a faulty interpretation of the Internal Revenue Code.
The official Form 843, Claim for Refund and Request for Abatement, is legitimately used by taxpayers in cases where they have not filed a return and the IRS has instead filed one for them using its Substitute for Return, or SFR, program. This happens when the IRS computer matching program discovers that it has a 1099 or other tax statement for a taxpayer but no actual return from that taxpayer. The IRS then creates a substitute return for the nonfiler. The SFR process, however, does not allow any deductions on the income that the agency discovered via statement matching. So filers for whom an SFR was created often produce evidence of deductions in connection with that income and see an abatement of some of the taxes.
That is legitimate; but the IRS says it has seen an increase in the incorrect use of the reason "Failed to properly compute and/or calculate Section 83-Property Transferred in Connection with Performance of Service" being claimed on abatement requests. This and other reasons that do not apply in connection with an abatement request, says the IRS, are scams.
9. Return preparer fraudIt's no secret criminals are out there looking to take advantage of taxpayers. But it's even more distressing when the person you trust to help you file your taxes turns out to be dishonest.
Every year, the IRS encounters unscrupulous tax return preparers who make money at the expense of their customers. Often they divert a portion of the taxpayer's refund to themselves. Even when the action isn't that blatant, the IRS warns that unethical preparers tend to charge inflated fees for their services and increase their clientele by advertising guaranteed larger refunds.
While a tax preparer who is convicted of tax crimes can be sent to jail, their clients also pay a price. No matter who prepares your return, you are ultimately responsible for all of the information on the 1040. When the fraud is discovered, you'll owe not only the back taxes, but also interest and penalty charges. This swindle underscores the need for all taxpayers to choose carefully when hiring a tax preparer.