This week the IRS published five "Dirty Dozen" list warnings. Each year, the IRS highlights various tax scams. This education helps taxpayers avoid tax trouble by using only the proper tax filing strategies.
The five scams on the "Dirty Dozen" list are frivolous arguments, hiding assets offshore, padding deductions, falsifying income to claim tax credits and micro-captive insurance transactions.
- Frivolous Arguments - Each year promoters of frivolous tax claims lead many taxpayers astray. The taxpayers claim zero income tax on dubious theories -- there is no duty to pay tax on religious or moral grounds, only federal employees must pay tax or only overseas income is taxable. IRS Commissioner John Koskinen stated, "Taxpayers should steer clear of tax-avoidance arguments and the unscrupulous promoters of such schemes. Taxpayers tangled up in these scams end up paying back taxes and often stiff penalties as well."
- Hiding Assets Offshore - American taxpayers may maintain bank accounts abroad, but they must disclose the account and pay applicable taxes on income. The Foreign Account Tax Compliance Act (FATCA) requires reporting of these bank accounts. The IRS has worked with foreign banks to encourage disclosure. Koskinen reports, "Offshore compliance remains a top IRS priority. We have collected $10 billion in back taxes in recent years with 100,000 taxpayers making use of our voluntary disclosure programs. The IRS receives more foreign account information each year, making it harder to hide income offshore. I urge taxpayers with international tax issues to come forward and get right with the system."
- Padding Deductions - Some taxpayers "fudge" or falsely claim extra deductions, expenses or credits. IRS software is updated each year to test for probable errors in reporting. If you are caught, the penalties may include 20% of the disallowed amount, $5,000 for a frivolous return, underpayment penalties and interest. It is best to use tax software to ensure you have an accurate return.
- False Income to Claim Tax Credits - If you use fraudulent documents to claim false income, the additional wages or self-employment income may increase your refundable credit. Some fraudulent tax preparers create improper reporting forms to do this. The IRS urges you to be careful to select a reputable tax preparer. You may find the information on www.irs.gov/chooseataxpro helpful in selecting a reputable tax preparer.
- Micro-Captive Insurance - Life insurance plans qualify for multiple tax benefits. Some taxpayers create "captive" insurance companies that are owned by the insured person. These can be qualified, but promoters may abuse them. The micro-captive insurance company may lack the appropriate attributes of a large insurance organization. In Notice 2016-66 (1 Nov 2016), the IRS classified some micro-captive insurance organizations as "Transactions of Interest." These micro-captive insurance companies are subject to specific IRS reporting obligations.