It’s that time of year again when the IRS makes a special effort to warn taxpayers about ever-evolving tax scams. Fake charities, phony R&D and fuel credits and fraudulent phone calls are highlighted in this year’s annual “Dirty Dozen” list.
A particularly egregious scam involves fraudsters masquerading as charitable organizations. Using a tax deduction as bait, they lure victims into making ineligible donations.
“Scam artists commonly use charities as a cover to lure honest people into providing money and sensitive personal information,” said IRS Commissioner Chuck Rettig. “Protect yourself, and make sure you are dealing with a reputable group before making a donation.”
The taxpayer who has been scammed faces higher taxes, interest and penalties.
The IRS offers these basic tips to taxpayers making charitable donations:
- Be wary of charities with names that are similar to nationally-known organizations. Some phony charities use names or websites that sound or look like those of legitimate organizations. The IRS website, www.irs.gov, has a search feature, Tax Exempt Organization Search, that allows people to find qualified charities. It is important to ask a charity for their Employer Identification Number (EIN) so you can verify their status through the IRS search tool.
- Don’t give out personal financial information, such as Social Security numbers or passwords, to anyone who solicits a contribution. Donors often use credit cards to make donations. Be cautious when disclosing credit card numbers to those seeking a charitable donation. Confirm that those soliciting a donation are calling from a legitimate charity.
- Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the donation.
Don’t Ever Pay IRS by Phone
Phone scams continue to rise, with aggressive criminals posing as IRS agents who call taxpayers demanding immediate tax payments and threatening prosecution. The scammers are trying to steal money or personal information, and these “phishing” schemes are surprisingly successful, having “cost thousands of people millions of dollars in recent years,” the IRS warns.
Here’s a typical scenario: A taxpayer gets an unsolicited call, and a voicemail is left by someone claiming to be an IRS official with an urgent callback request. The person demands that the victim pay a bogus tax bill by sending cash through a wire transfer, prepaid debit card or gift card. These scammers may alter or “spoof” their caller ID to make it look like the IRS or another agency is calling. The callers may use IRS employee titles and fake badge numbers to appear legitimate.
Here are things the IRS will never do:
- Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. The IRS will first mail a bill to any taxpayer who owes taxes.
- Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.
- Demand that taxes be paid without giving taxpayers the opportunity to question or appeal the amount owed.
- Ask for credit or debit card numbers over the phone.
- Call about an unexpected refund.
Business tax credit scams
Research & Development Credits
The IRS also warns taxpayers to avoid improperly claiming business tax credits, a common scam offered by unscrupulous advisors. Two credits recently targeted for abuse are the research and development (R&D) credit and the fuel tax credit. Improper claims for the R&D credit involve a failure to participate in or substantiate qualified research activities or a failure to satisfy all of the requirements. To get the credit, a taxpayer’s research activities must involve a process of experimentation using science with a goal of improving a product or process the taxpayer uses in their business. For a detailed discussion of the R&D tax credit, look no further than Frazier & Deeter’s website.
Most scams involve claiming the credit for expenses for nonqualified activities. Unsupported claims for the research credit may subject taxpayers to penalties.
Fuel Credits Limited
The federal government taxes gasoline, diesel fuel, kerosene, alternative fuels and other types of fuel. Some commercial uses of these fuels are nontaxable. Taxes paid for fuel to power vehicles and equipment used off-road may qualify for the credit, including farm equipment, boats, trains and airplanes. Most taxpayers are not eligible for this credit. Still, the IRS routinely finds “unscrupulous tax advisors who have enticed sizable groups of taxpayers to inflate their refunds by erroneously claiming the credit.”
Improper claims for the fuel tax credit usually come in two forms. First, an individual or business may make an erroneous claim on their otherwise legitimate tax return. Second, identity thieves file bogus claims, often as part of a broader fraudulent scheme.
The IRS has stepped up efforts to improve fuel credit compliance. The IRS’s processing systems, including new identity theft screening filters, are now catching a significant number of questionable fuel tax credit refund claims.
What is the best way to avoid scams? Talk to your Frazier & Deeter tax professional about any strange communications you receive to make sure you have the best possible information.