The IRS’ ‘Dirty Dozen’

The IRS has released its “Dirty Dozen” list of top tax crimes for 2013.  The list is intended as an annual warning to taxpayers as they file their returns, but it also serves as a good clue as to their priorities for investigating and prosecuting tax crimes.  Here is the list:

  1. Identity Theft
  2. Phishing
  3. Return Preparer Fraud
  4. Hiding Income Offshore
  5. “Free Money” from the IRS & Tax Scams Involving Social Security
  6. Impersonation of Charitable Organizations
  7. False/Inflated Income and Expenses
  8. False Form 1099 Refund Claims
  9. Frivolous Arguments
  10. Falsely Claiming Zero Wages
  11. Disguised Corporate Ownership
  12. Misuse of Trusts

A closer look at the list reveals that the IRS is actually concerned with 4 broad categories of tax fraud and tax evasion.  The 12 “crimes” are actually just examples of each of these different categories.  They are best summarized as:

  • Identity Theft
  • Preparer Fraud
  • False and fraudulent statements to the IRS
  • Concealment of income and assets

Since this is a list designed to help taxpayers, half of the crimes are committed by third parties against the innocent taxpayers as well as the federal government.

Identity Theft:  This is the first crime on the list and is clearly one of the agency’s top priorities.  The crimes fitting under this category are:

  1. Identity Theft
  2. Phishing
  3. Return Preparer Fraud
  4. Impersonation of Charitable Organizations

A more detailed description of identity theft and its tax implications can be found here (insert link).  Identity Theft has become one of the number one ways individuals defraud the Internal Revenue Service as identity thieves file false returns in other people’s names in order to collect tax refunds.  Other crimes on the list that contribute to identity theft are Phishing, Return Preparer Fraud and Impersonating Charitable Organizations.  All three of these are means by which identity thieves obtain unsuspecting taxpayer’s personal information.  Given that more than 400,000 false returns were filed by identity thieves last year alone, it’s unsurprising that the IRS has made this one of their top priorities.

Preparer Fraud:  While preparer fraud also contributes to identity theft, it is also a distinct category in its own right.  The crimes from the dirty dozen list that fit under this category are:

  1. Return Preparer Fraud
  2. “Free Money” from the IRS & Tax Scams Involving Social Security
  3. False/Inflated Income and Expenses
  4. False Form 1099 Refund Claims
  5. Frivolous Arguments

The IRS has warned about two types of preparer fraud: identity theft as discussed above and preparers who sell bogus tax refunds to taxpayers.  These preparers will represent to taxpayers that they can obtain a larger refund than that to which they are entitled.  After paying the tax preparer to produce a fraudulent refund, the preparer will cease operations and leave the taxpayer to deal with negative response from the IRS.

False Statements:  The IRS has highlighted four types of false statements made in tax filings that they are alerted to.  The false statements from the dirty dozen list are:

  1. False/Inflated Income and Expenses
  2. False Form 1099 Refund Claims
  3. Frivolous Arguments
  4. Falsely Claiming Zero Wages

You can find a description of false/inflated income and expenses from a business perspective here (insert link).  False Form 1099 Refund claims are typically promoted by fraudulent preparers who convince taxpayers that the government has money waiting for them in secret accounts.  This could also be included under “Frivolous Arguments” but is apparently so pervasive that the IRS felt it needed to be its own category.

Concealment Schemes:  These schemes involve hiding income and assets from the IRS in order to avoid taxation.  The crimes listed that fall under this category are:

  1. Hiding Income Offshore
  2. Disguised Corporate Ownership
  3. Misuse of Trusts

Offshore abuse and misuse of trusts can be found here and here (insert links).  One aspect of offshore abuse is failing to complete a Report of Foreign Bank Accounts (FBAR), and to learn more, you can go here (insert link).  These schemes all involve concealing assets in a myriad of ways so that income is not reported to the IRS.  It’s important to remember that there is nothing inherently illegal about foreign accounts, trusts or forming a corporation to manage assets.  All of these entities can even be used legally to reduce an individual’s tax burden.  But when used improperly in an abusive manner to conceal assets from the federal government, they can leave the person behind them vulnerable to criminal penalties.  A good rule of thumb in evaluating whether or not one of these entities breaks the law is whether or not it is being used to conceal income and assets.

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