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Six 'Dirty' Tax Scams You Need to Avoid

With taxes due today (Monday), the IRS has some warnings for you that can be summed up in a few words: Beware tax scams.

Plenty of con artists and cheats are champing at the bit to "help" anyone who wants to pay as little as possible.

So if you're one of the more than 200 million Americans who will file taxes this year, make sure you have a trusted accountant or other reliable person who can help you comply with IRS rules.

"This tax season, the IRS has stepped up its efforts to protect taxpayers from a wide range of schemes, including moving aggressively to combat identity theft and refund fraud," IRS Acting Commissioner Steven T. Miller said. "The Dirty Dozen list shows that scams come in many forms during filing season. Don't let a scam artist steal from you or talk you into doing something you will regret later."

So if you haven't already filed your taxes, do so before it's too late – and don't fall for these scams.

Don't Become a Victim

The danger of becoming a victim of tax fraud continues to grow. Last year, the IRS prevented the issuance of $20 billion in returns based on fraudulent claims, up from $14 billion in 2011.

From the IRS's "Dirty Dozen" list of tax schemes, here are six scams taxpayers should strive to avoid:

  • Identity Theft: The IRS Criminal Investigation tripled the number of identity theft investigations in fiscal year 2012, starting 900 investigations. This involves someone using a stolen identity to file a return and claim a refund. Many times, the identity thief actually uses a legitimate taxpayer's identity to fraudulently file a tax return and get a refund.
  • Phishing: This scam is usually done with the help of unsolicited e-mail or a fake website that fronts as a legitimate site to lure potential victims and prompt them to provide personal and financial information. With this information, a criminal can commit identity or financial theft.
  • Return Preparer Fraud: Over 60% of taxpayers will have professional assistance to file their returns this year. But just because you have help doesn't mean you're safe. The IRS wants to remind all taxpayers that they should use only preparers they trust, who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers. And remember that you're legally responsible for what's on your tax return even if it is prepared by someone else.
  • Hiding Income Offshore: It's not illegal to stash money in foreign countries, but it is illegal to hide income in offshore accounts in order to avoid paying U.S. taxes. The IRS acknowledges that there are legitimate reasons for keeping money overseas in cash, brokerage accounts or other investments, but that activity must be reported properly.
  • "Free money" from the IRS and Tax Scams Involving Social Security: The IRS warns that flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches around the country. These schemes promise refunds to people who have little or no income and normally don't have a tax filing requirement. These scams are often spread by word of mouth as gullible, but well-intentioned people tell their friends and relatives.
  • False/Inflated Income and Expenses: Claiming income you did not earn or expenses you did not pay in order to to secure larger refundable credits, such as the Earned Income Tax Credit, is illegal and could have serious consequences. The IRS could force repayment of erroneous refunds, including interest and penalties, and in some cases, criminally prosecute offenders. In addition, the IRS has noticed a spike in excessive claims for the fuel tax credit. Usually, this credit is available to farmers and other taxpayers who use fuel for off-highway business purposes. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.

The IRS also warns of common mistakes among filers. These include overestimating the value of donations and business expenses and neglecting to record a dependent or take advantage of IRA deductions.

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