Beware the ‘dirty dozen’ tax scams

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Tax season is prime tax scam season. As taxpayers are trying to decipher new tax laws, criminals take advantage of the confusion and concern about filing to dupe unsuspecting filers.

Bankrate's 2010 Tax Guide

Some scam artists come up with patently false schemes to wheedle personal information and money from unsuspecting taxpayers. Others take real tax breaks, or portions of legal write-offs, and illegally apply them.

The IRS tracks the multitude of schemes and each year compiles a list of the 12 most egregious tax-related scams. This filing season, 11 of the scams are making a repeat appearance on this list, including the criminals’ perennial favorite, phishing.

Other cons still making the rounds include frivolous tax arguments, retirement scams, misuse of trusts and improper charity deductions. And some folks can’t even trust their tax pros, with unscrupulous preparers once again making the annual list.

You can read descriptions of the scams, as well as the 11 others that made the 2009 and 2010 lists, in Bankrate’s look at last year’s dirty dozen list.

Here are 2010’s dirty dozen tax scams:

  1. Return preparer fraud.
  2. Hiding offshore income.
  3. Phishing.
  4. Filing false or misleading forms.
  5. Nontaxable Social Security benefits with exaggerated withholding credit.
  6. Abuse of charitable organizations and deductions.
  7. Frivolous arguments.
  8. Abusive retirement plans.
  9. Disguised corporate ownership.
  10. Zero wages.
  11. Misuse of trusts.
  12. Fuel tax credit scams.

New to this year’s list is No. 5, questionable claims regarding Social Security taxes withheld. The IRS says it’s seeing more returns where taxpayers report nontaxable Social Security income along with exaggerated withholding amounts in order to get a refund. In many cases, say tax examiners, the income amounts and withholding figures are incorrect.

This is based on a real tax credit. Claiming overpaid Social Security taxes is legitimate in cases where, for example, you have multiple jobs and the 6.2 percent payroll tax is withheld from your wages on earnings that exceed the taxable wage base. In 2009, that income level was $106,800; it’s the same in 2010.

In these cases, your multiple employers each collect the withholding, meaning your total wages upon which you paid Social Security taxes could be more than the limit so you paid more than the maximum of $6,621.60 in payroll taxes. You’re allowed to collect any overpayment as a credit when you file your return.

Scams steep costs

If the IRS catches you making a fraudulent Social Security withholding claim, you could face a $5,000 fine.

But fines aren’t the only price of false filing. Each of these tax-oriented cons has serious consequences, not just for the perpetrators, but also for their victims.

If convicted of tax fraud or evasion, scam promoters face tax penalties, interest and criminal prosecution.

And taxpayers who bought into a scam, even if they are unwitting victims, could themselves in deeper debt to the IRS. In addition to possible fines, federal law requires you pay your rightful taxes, plus any penalty charges and back interest that accrued because of your use of dubious tax-relief techniques.

Gone but not forgotten

Gone from the 2010 list is filing false refund claims and abatement requests.

But just because a scam didn’t make the IRS’s annual list doesn’t mean that criminals have stopped using it. It’s just that other scams are showing up more frequently.

The IRS says taxpayers should remain wary because old scams often resurface or evolve. And the absence of a particular scheme from the annual blatant scam list should not be taken as an indication that the IRS is unaware of it or not taking steps to counter it.

Reporting scams

IRS offices across the country keep constant tabs on not just the annual top 12 tax scams, but on the many other cons out there. If you encounter any of the dirty dozen or are approached with a new one, the IRS wants to know.

Report suspected tax fraud by filing Form 3949-A. The more information you can provide the IRS, the better the chance the agency’s investigators have of catching those running the scam.

You don’t have to identify yourself when you send in the form, but the IRS says it could help its investigation if it needs to contact you for additional information. If you do provide your name, the IRS says it will keep your identity confidential.

You also might be eligible for a reward for reporting illegal tax activity by filing Form 211 with the IRS Whistleblower Office.

Finally, remember that old tax saying: If a tax break sounds too good to be true, it probably is.