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Beware these 'dirty dozen' tax scams that can cost you big and even land you in jail

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Don't be a tax scam victim
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Don't be a tax scam victim | Klaus Vedfelt/Getty Images

Don't be a tax scam victim

'Tis the season for unsuspecting taxpayers to become tax scam victims, says the IRS.

Every year, the IRS issues its list of the dirty dozen worst tax scams. They range from improper application of real but arcane tax laws to downright false claims, along with perennial attempts to get individuals to provide personal information that can be used to steal identities.

The scams are perpetrated online, by phone, email and in person. In some cases, taxpayers can't even trust their tax preparers.

Worse, both tax scam victims and perpetrators could find themselves in real trouble with the IRS. After the tax con artist has compromised your personal data and taken some, if not all, of your tax refund, you could face significant penalties and interest for not filing a proper tax return or not paying what you legally owe.

Check out the top 12 tax scams of 2017 so you won't fall prey to them. The annual list starts with some of the more obscure cons and ends with those that ensnare the most tax victims.

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Offshore tax cheating | MICHAEL BUHOLZER/Getty Images

Offshore tax cheating

There's nothing illegal about putting money into a foreign bank account. But putting it in a foreign bank account for the purpose of hiding money from the IRS by is illegal.

These so-called offshore accounts, as well as associated debit cards, credit cards and wire transfers, have cost the U.S. Treasury billions of dollars. So the IRS is continuing its crackdown on individuals it believes are evading U.S. taxes by hiding income outside the United States.

The agency is offering taxpayers with offshore accounts a chance to come clean with the Offshore Voluntary Disclosure Program, reopened in 2012. Since the first program was introduced in 2009, tens of thousands of taxpayers have come forward to resolve their tax obligations.

"Offshore compliance remains a top IRS priority," says IRS Commissioner John Koskinen. "We've collected $10 billion in back taxes in recent years, with 100,000 taxpayers making use of our voluntary disclosure programs."

For those who insist on keeping their foreign accounts secret, beware. The IRS and Department of Justice investigators are pursuing taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas.


Frivolous tax arguments | Jose Luis Pelaez Inc/Getty Images

Frivolous tax arguments

The IRS refers to various claims to avoid filing and paying taxes as "frivolous arguments." A better name is "jailbait."

A popular claim is that return filing is voluntary. It's not. In fact, the IRS has tougher penalties for not filing than it does for not paying taxes owed.

Some taxpayers believe they can refuse to pay taxes on religious or moral grounds by invoking the First Amendment. Others say that only federal government employees must pay income tax. Not true.

Then there's the argument that wages, tips and other compensation received for personal services are not income. Please check the dictionary along with the tax code. Money received via whatever method is income. And it is subject to an income tax.

These are only a few of the frivolous tax arguments that anti-tax advocates use to encourage taxpayers to avoid filing and paying taxes. The IRS has a 68-page list of them that you should check before falling for these scams.

Taxpayers could face criminal prosecution for tax evasion as well as a felony conviction for filing a false return.

And if you are still tempted, just remember that they didn't do Wesley Snipes -- who served tax evasion time in a federal prison -- any good.

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Abusive tax shelters | Tetra Images/Getty Images

Abusive tax shelters

For the third year in a row, abusive micro-captive insurance tax shelters make the list of the IRS' dirty dozen tax scams.

Here's how they work: Businesses are generally allowed to create captive insurance companies to protect against certain risks. The insured business claims deductions for insurance premiums, which are paid to a captive insurance company owned by the insured or by related parties.

With abusive micro-captive structures, accountants or wealth planners persuade business owners to participate in schemes that are off the mark. For instance, the coverage may insure "implausible risks, fail to match genuine business needs or duplicate the taxpayer's commercial coverages," according to the IRS. Premium amounts may be overpriced.

Trusts set up for the purpose of wealth transfer also can fall into this category. Trusts can be valuable legal arrangements to deal with many complex family, financial and tax issues. However, trusts designed solely to hide assets from the IRS are illegal.

Trusts can be complicated, so don't take the word of a stranger offering to set up one that will reduce your tax bill. Find an attorney or other trained tax professional who can help you establish a proper, legal trust.


Falsifying income | Kelvin Murray/Getty Images

Falsifying income

Most tax cheats report less income than they make, so their tax liability will be less. But in some cases, a taxpayer needs more money to get a tax break's maximum benefit.

The IRS says it regularly sees fraudulent income inflated by individuals seeking a refundable tax credit, such as the earned income tax credit, for which they otherwise wouldn't qualify.

Credits prompt such unscrupulous acts because they are better tax breaks than deductions. A deduction lowers taxable income, while a credit lowers the actual tax bill dollar for dollar. Refundable credits, as the name indicates, allow filers who don't owe any taxes to get a refund.

Another related scam involves filing a fake form 1099-MISC that appears to be issued by a legitimate financial company a taxpayer may have done business with. If a tax preparer produces a fake 1099 and a bogus financial instrument such as a bonded promissory note that's supposed to be a "debt payment option" for credit cards or mortgage debt, your scam detector should go off loudly.

Remember: Even if your tax return is prepared by someone else, you are legally responsible for the information it contains.

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Falsely padding deductions | Flashpop/Getty Images

Falsely padding deductions

The IRS warns against falsely inflating deductions or expenses on tax returns.

While doing this can result in a lower tax bill or a bigger refund than is due, the risk isn't worth the reward. But because each year some taxpayers "fudge" this information, it remains on the IRS' dirty dozen tax scams list for the second consecutive year.

Some taxpayers overstate their charitable deductions, pad their business expenses or claim credits to which they're not entitled, such as the earned income tax credit or the child tax credit. If your tax preparer is suggesting that you do this, resist the temptation.

The IRS has been streamlining its increasingly efficient automated systems to detect this type of fraud, generating the dreaded tax audit. If a return is found to be erroneous, taxpayers may be subject to stiff fines and penalties. They include all taxes owed plus 20 percent of the disallowed deduction amount, and an additional 75 percent of the amount owed if the underpayment on the return resulted in tax fraud.

The best defense is to file an accurate return.


Excessive business credit claims | Justin Lewis/Getty Images

Excessive business credit claims

As any motorist can attest, Uncle Sam collects taxes on gasoline, diesel and other types of fuel. However, some commercial uses of these fuels are nontaxable.

Such tax-free fuel circumstances include the use of farm equipment, certain boats, trains and airplanes. In some cases, individuals and businesses that purchase fuel for one of those purposes can even claim a tax credit.

That possibility has led to improper claims for the fuel tax credit.

The false fuel tax-credit claims generally come in two forms, says the IRS. An individual or business may make an erroneous claim on their otherwise legitimate tax return. Or an identity thief may claim the credit in a broader fraudulent scheme.

The research tax credit is another of these business tax credits that have been misused by scammers.

The IRS says the filters in its tax processing software have prevented a significant number of questionable tax credit claims from going through. The IRS has taken additional steps to identify returns for review that claim fuel tax and other tax credits. Unsupported claims for these credits may land taxpayers and their preparers in serious IRS trouble.

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Inflated refund claims | Mark Edward Atkinson/Getty Images

Inflated refund claims

Have you run across someone who says you can get free money when you file taxes? Steer clear.

Tax con artists who claim they can get filers free money from the IRS based on fictitious Social Security benefits or false tax credit claims find enough gullible victims to keep this egregious tax scam on the dirty dozen list.

The IRS says con artists specializing in these schemes tend to target low-income individuals and the elderly. The scam typically appears as fliers advertising free money from the IRS. They usually are posted in churches, and then the word spreads by unsuspecting and well-intentioned people who want to share the news with friends and family.

The scam perpetrator gets taxpayer hopes up, collects money to file the fake claims and then is long gone by the time victims learn their claims are rejected.

"Exercise caution when a return preparer promises an extremely large refund or one based on credits or benefits you've never been able to claim before," says IRS Commissioner John Koskinen. "If it sounds too good to be true, it probably is."


Fake charities | Tim Robberts/Getty Images

Fake charities

The tax code offers benefits for philanthropic taxpayers. It does not, however, reward those who set up improper nonprofit groups or illegally donate to them.

The IRS warns generous folks to check out charities before donating to them. Some scammers copy legitimate organizations, bearing similar names and setting up websites that look like the real deal.

Unfortunately, when bad things happen, bad people take advantage, tax and otherwise. That's why, when there are significant natural disasters, con artists come out in droves.

They impersonate charities to get money or private information from well-intentioned taxpayers, using a variety of tactics.

Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. 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. Instead, they get personal financial information that can be used to steal the victims' identities or financial resources.

To verify the organization's legitimacy, ask for the charity's employer identification number, or EIN, and check it against the IRS' Exempt organizations tool. And don't give or send cash. Use a check or credit card to document your gift for tax purposes.

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Return preparer fraud | Thomas Barwick/Getty Images

Return preparer fraud

The IRS expects around 60 percent of taxpayers to use tax professionals to prepare and file their tax returns. In most cases, those tax return preparers provide honest service to their clients.

But, as in any other business, there are unscrupulous tax pros.

Questionable return preparers have been known to skim off their clients' refunds, charge excessive fees for return preparation services and attract new clients by promising guaranteed or inflated refunds.

Choose your tax pro carefully. Be wary of one who does not have a tax ID number from the IRS. Other warning signs that your tax pro might not be working in your best interest include a requirement that you split the refund to pay his or her preparation fee, refusal to give you a copy of your return, addition of forms to your return that you had not seen before, and the preparer's reluctance to put his or her signature on the return.

When choosing a tax pro, ask about his or her qualifications -- is the preparer an attorney, enrolled agent or CPA? Tax return preparers aren't required to have a professional credential. Nevertheless, the IRS's directory can help you find a qualified preparer.


Identity theft | Chad Slattery/Getty Images

Identity theft

Last year, identity theft was at the top of the dirty dozen tax scams list. It's still a big problem, but the IRS is working with state tax agencies and the tax industry to improve the situation, and they've made progress. In 2016, for instance, the number of taxpayers reporting stolen identities on their tax returns fell by 50 percent-plus, with about 275,000 fewer victims than the year before.

Tax-related identity theft occurs when scammers with stolen Social Security numbers file tax returns before the real, unsuspecting taxpayers do so. The crooks end up collecting fraudulent refunds.

The IRS advises taxpayers and tax pros to always use security software with firewall and anti-virus protections. Make sure the security software is always turned on and can automatically update.

Encrypt sensitive tax records stored on the computer, and use strong passwords. Always protect your personal data.

The IRS has a special section on IRS.gov dedicated to identity theft issues. If you discover or fear you are a tax ID theft victim, contact the IRS Identity Protection Specialized Unit toll-free at (800) 908-4490.

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Phone scams | Klaus Vedfelt/Getty Images

Phone scams

Telephone tax scams have been around for ages, and they remain a major threat during the 2017 filing season. More than 10,000 victims have collectively paid over $54 million as a result of these scams since October 2013.

Tax phone scams include many variations, but all try to steal taxpayers' money or identity.

Some scammers tell folks who take the calls that they are entitled to huge refunds; all they need to do is provide some personal information. Other con artists use fear, threatening taxpayers with revocation of their driver's license or even arrest or deportation if their tax situations aren't cleared up immediately.

Scammers claiming to be IRS officials demand that a bogus tax bill be paid via a wire transfer, prepaid debit card or a gift card such as an iTunes card.

Hang up and don't engage with the IRS impersonator.

The IRS will first mail a bill to anyone who owes taxes. The agency doesn't threaten anyone with arrest. And it will never ask for credit or debit card numbers over the phone.

If you get a phone call from someone claiming to be from the IRS, call the Treasury Inspector General for Tax Administration at (800) 366-4484 toll-free, or report the IRS impersonation scam online.


Phishing | ImagesBazaar/Getty Images

Phishing

Phishing scams always hover near the top of tax scam lists, but this year they rose to the apex of IRS' tax scams list. These attempts to get hold of taxpayer personal information occur year-round, but the IRS saw a big spike in phishing and malware incidents during the last tax season.

Phishing attempts typically arrive via unsolicited email or a fake website that looks remarkably like the real one. When the targeted victim answers the email or enters in valuable personal and financial information online, the criminals have enough to steal the person's identity and ruin his or her financial life.

Tax phishers usually pose as an IRS representative. Don't fall for it. The IRS doesn't send unsolicited emails to taxpayers. Neither does it seek personal information via other electronic avenues, such as text messages and social media channels.

If you get suspicious communications purporting to be from the IRS, ignore them. But do let the tax agency know by forwarding suspicious emails to phishing@irs.gov. The IRS works with federal law enforcement to shut down the bogus websites and track down the criminals who created them.

Get a guestimate of taxes owed with Bankrate's 1040 Tax Estimator.

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