The Tax Professional’s “Dirty Dozen” List

April 15 is looming. For tax professionals across the country, the emergence of spring also means it’s time to hunker down to prepare tax returns. In the midst of preparing returns and meeting deadlines, tax professionals must also consider the reality that tax advice and return preparation reportedly result in the greatest number of claims against accountants. Some good news is that there are common themes amongst the types of claims facing tax professionals which provide insight and valuable lessons. In particular, the IRS publishes an annual list of the “dirty dozen” tax scams which can provide an important risk management tool to the APL community. In its recently published 2014 list, identify theft and phone scams top the charts.

Here is a summary of the 2014 dirty dozen list:

1.         Identify Theft. Tax fraud through the use of identity theft tops this year’s Dirty Dozen list.

2.         Pervasive Telephone Scams. The IRS has seen a recent increase in local phone scams across the country, with callers pretending to be from the IRS in hopes of stealing money or identities from victims.

3.         Phishing. Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.

4.         False Promises of “Free Money” from Inflated Refunds. Scam artists routinely pose as tax preparers during tax time, luring victims in by promising large federal tax refunds or refunds that people never dreamed they were due in the first place.

5.         Return Preparer Fraud. About 60 percent of taxpayers will use tax professionals this year to prepare their tax returns. Most return preparers provide honest service to their clients. But, some unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.

6.         Hiding Income Offshore. Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

7.         Impersonation of Charitable Organizations. Another long-standing type of abuse or fraud is scams that occur in the wake of significant natural disasters.  Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers.

8.         False Income, Expenses or Exemptions. Another scam involves inflating or including income on a tax return that was never earned, either as wages or as self-employment income in order to maximize refundable credits. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits could have serious repercussions.

9.         Frivolous Arguments. Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe.

10.       Falsely Claiming Zero Wages or Using False Form 1099. Filing a phony information return is an illegal way to lower the amount of taxes an individual owes.

11.       Abusive Tax Structures. Abusive tax schemes have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions.

12.       Misuse of Trusts. Trusts also commonly show up in abusive tax structures. They are highlighted here because unscrupulous promoters continue to urge taxpayers to transfer large amounts of assets into trusts.

Knowledge of the potential risks facing tax practitioners is a key in avoiding, or defending, a claim. The foregoing list provides some, but obviously not all, of those risks.  Especially during tax season, professionals must be diligent in following internal risk management protocol to put themselves in a better position to avoid malpractice.