The Internal Revenue Service yesterday wrapped up its annual “Dirty Dozen” list of scams and schemes to watch out for — especially during tax season.
And it’s not all about attacks by identity thieves and cybercriminals: local experts warn that for businesses, careless and underhanded tax preparers can wreak havoc too.
“It’s important to do a little bit of due diligence up front,” said Jordan Empey, tax partner at SKR+Co. “Ask what kind of security systems that firm or that preparer uses. How does that preparer send information that’s sensitive in nature? [Is it] through secure files, similar to what banks send, or through client portals? One of the worst things is sensitive information floating around in somebody’s in-box.”
Rick Lucy, director at BKD CPAs and Advisors, agreed.
“You really should be doing due diligence on your tax preparer,” he said. “In general, you should look for somebody who’s going to do it for a fixed fee as opposed to contingency. … If they can’t file electronic returns that’s a pretty big red flag.
“Bigger things to keep an eye on: They promise you a guaranteed refund or [a refund] higher than you’d normally expect, or say that they could take deductions that you aren’t entitled to and get away with it, or [recommend] offshoring or hiding income. Those are always red flags to keep an eye on, that your tax preparer shouldn’t be doing.”
Empey’s list of red flags includes “inflated refund claims, preparers that are padding deductions, creating extra deductions that are not real, and falsifying income for tax credits.
“These things all show up every year on the Dirty Dozen list from the IRS,” he said.
In a news release, the IRS warned taxpayers to guard against ploys to steal their personal information, and to “be wary of shady promoters trying to scam them out of money or talk them into engaging in questionable tax schemes.
“The IRS reminds people that participating in illegal schemes can lead to significant fines and possible criminal prosecution,” the release added.
For 2018, the “Dirty Dozen” list includes:
Return Preparer Fraud: Some dishonest tax return preparers scam clients and engage in refund fraud and identity theft.
Inflated Refund Claims: Preparers who ask clients to sign a blank return, promise a big refund before looking at records or charge fees based on a percentage of the refund are probably up to no good.
Phishing: Watch out for fake emails or websites looking to steal personal information.
Phone Scams: Phone calls from criminals impersonating IRS agents are an ongoing threat, with new twists every year.
Identity Theft: Be aware of tactics aimed at stealing personal information.
Fake Charities: Groups masquerading as charitable organizations — often using deceptively similar names — solicit donations from unsuspecting donors.
Excessive Claims for Business Credits: Avoid improperly claiming the fuel tax credit — it’s generally not available to most taxpayers. (The credit is usually limited to off-highway business use, including use in farming.)
Falsely Padding Deductions on Returns: Don’t falsely inflate deductions, such as charitable contributions and business expenses, or improperly claim credits like the Earned Income Tax Credit or Child Tax Credit.
Falsifying Income to Claim Credits: Con artists may convince unsuspecting taxpayers to invent income to erroneously qualify for tax credits. Victims can face large bills to pay back taxes, interest and penalties.
Frivolous Tax Arguments: Avoid frivolous tax arguments designed to avoid paying tax. Promoters of these schemes encourage taxpayers to make outlandish claims about the legality of paying taxes despite being repeatedly thrown out in court. The penalty for filing a frivolous tax return is $5,000.
Abusive Tax Shelters: Be on the lookout for people peddling tax shelters that sound too good to be true — the IRS is committed to stopping abusive tax structures used to avoid paying taxes. When in doubt, seek an independent opinion regarding complex products.
Offshore Tax Avoidance: Successful enforcement actions against offshore cheating show it’s a bad bet to hide money and income offshore, the IRS says.
“Taxpayers should always keep in mind that they are legally responsible for what is on their tax return even if it is prepared by someone else,” the IRS news release added. “Consumers can help protect themselves by choosing a reputable tax preparer.”
See the IRS’ recommendations for choosing a tax pro: irs.gov/tax-professionals/choosing-a-tax-professional.
Take a closer look at this year’s tax scams — and what to do if your business is targeted — in the March 23 edition of the Business Journal.