The Worst Tax Scams of 2011

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NEW YORK (MainStreet) — Some Americans will do anything to get out of paying their taxes, but if you (or your tax preparer) are looking for ways to beat the system this year, it may pay to think again. The Internal Revenue Service knows virtually all the tricks in the book.

The IRS recently released its annual list of the worst tax scams and warned consumers to steer clear of these schemes or face significant financial penalties. The warning is particularly relevant now that we’ve entered the home stretch of tax season, as many consumers who have yet to file have probably put it off because they owe money.

The scams on the list, which the IRS refers to as the “dirty dozen,” range from well-known tactics such as storing money in an offshore account to more subtle schemes like claiming excessive deductions for fuel tax credits.

Several of the scams on the list may originate from tax preparers themselves. For example, tax advisers have been known to recommend that clients ignore limits on individual retirement account contributions and shift more money into these funds at tax time, or transfer excessive assets into trusts as a means to deduct more personal expenses. In some cases, particularly devious advisers may use these tactics to boost their clients’ tax refunds and skim some of the money from those refunds for themselves.

Aside from these scams, there are some fairly obvious methods that have probably crossed the minds of many taxpayers. The IRS notes that taxpayers have lied about how much they earn, exaggerated or completely made up charitable donations to boost deductions and claimed to have withheld more in Social Security than they really did to reduce their taxable income.

And then there are the “frivolous arguments,” as the IRS refers to them, in which taxpayers try to get out of paying their fair share by relying on bogus logic. Some taxpayers have argued that filing taxes is not mandated by the constitution, making it really up to each person to decide whether filing taxes is right for them. Others have actually tried to claim filing taxes violates their religious or moral beliefs, though the Supreme Court has repeatedly determined this to be a baseless argument.

If the IRS suspects you have tried any of these scams, you will be audited and potentially fined $5,000 or more, or even imprisoned for some of the more egregious offenses. On the other hand, if you know someone who has pursued one of these scams, you can notify the IRS and potentially get a reward for your efforts.

The full list of the worst scams is below:

1.    Hiding income offshore

2.    Identity theft and phishing

3.    Return preparer fraud

4.    Filing false or misleading forms

5.    Frivolous arguments

6.    Nontaxable Social Security benefits with exaggerated withholding credits

7.    Abuse of charitable organizations and deductions

8.    Abusive retirement plans

9.    Disguised corporate ownership

10.    Zero wages

11.    Misuse of trusts

12.    Fuel tax credit scams

—For a comprehensive credit report, visit the BankingMyWay.com Credit Center.

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