Don't Be a Victim to the 2011 Dirty Dozen Tax Scams

Each year, the IRS releases its annual "Dirty Dozen" tax scams. While they're not mentioned in the 1967 war film of the same name, these 12 dirty tax scams are enough to make an honest taxpayer cringe.

"The Dirty Dozen represents the worst of the worst tax scams," IRS Commissioner Doug Shulman said in his April 7press release. "Don't fall prey to these tax scams. They may look tempting, but these fraudulent deals end up hurting people who participate in them."

The IRS identified the following as the Dirty Dozen for 2011:

Hiding income in offshore holdings

You've seen it in movies, but in actuality, many taxpayers illegally move their assets and money into overseas accounts and tax-sheltered holdings. Others create false entities and trusts into which their money is funneled.

ID theft and phishing schemes

The IRS has seen a steady increase in ID theft as it relates to taxes. In some cases, individuals fraudulently work under someone else's Social Security number in order to avoid filing and paying taxes. Other times, a tax return may be filed under a 'borrowed' or 'purchased' Social Security number in order to make a claim for a refund.

Phishing is a term used to describe any electronic communication that purports to be from the IRS but is not. The IRS does not, under any circumstance, email taxpayers. In some cases, the email appears to be very legitimate; it may use IRS logos or appear to mirror the IRS web site. Any such emails should be forwarded, unopened, to phishing@irs.gov .

Return preparer fraud

Unscrupulous tax preparers may look to take advantage of you by charging exorbitant or hidden fees, skimming off of your refund, or even submitting a tax return that claims a higher refund than the one they have 'copied' you with.

According to the IRS press release, in order to "increase confidence in the tax system and improve compliance with the tax law, the IRS is implementing a number of requirements for paid tax preparers, including registration with the IRS and a preparer tax identification number (PTIN), as well as competency tests and ongoing continuing professional education."

Filing false claims or misleading tax forms

Don't be duped by a tax preparer or any online advice that claims to provide you with a bloated refund that seems too good to be true. Educate yourself as to what credits or exemptions you are legally entitled to. Don't stretch your allowable expenses to the point where the IRS now has you under their watch.

Frivolous arguments

The reason they are frivolous is because the IRS has heard all such arguments, litigated on them in court, and debunked them. If someone tries to involve you in a de-taxing or un-taxing scheme, check out the IRS publication The Truth About Frivolous Tax Arguments.

Nontaxable Social Security benefits with exaggerated withholding credit

In many cases, a taxpayer's Social Security is non-taxable, or only a portion may be taxable. Fraudulently reporting exaggerated withholdings in conjunction with non-taxable benefits has been identified as a growing trend. Who knew our seniors were so sneaky?

Abusing charitable organizations or deductions

If you give to charity, then by all means, you are allowed to take the legal deduction. Unfortunately, many take advantage of these acts of 'goodwill' and grossly overestimate the value of their donation.

For guidelines governing donations to charities for tax purposes, see IRS Publication 526, Charitable Donations.

Retirement plans

The IRS says the following regarding abusive retirement plans: "The IRS is looking for transactions that taxpayers use to avoid the limits on contributions to IRAs, as well as transactions that are not properly reported as early distributions. Taxpayers should be wary of advisers who encourage them to shift appreciated assets at less than fair market value into IRAs or companies owned by their IRAs to circumvent annual contribution limits."

Disguised corporations

Illegal corporations, S-corps or LLCs created to shield or bury assets will be aggressively pursued by the IRS. According to the IRS, such entities can be used to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes and even terrorist financing.

Reporting zero wages

Form 4852, Corrected W-2, has been used fraudulently to report incorrect information that reduces the actual W-2 amount, in some cases, down to zero. Be wary of any advice that claims that wages are not taxable.

Misuse of trusts

While there are legitimate reasons to transfer assets into trusts, such as for estate planning, the IRS has seen a rise in illegal trusts being formed or the incorrect housing of cash in a trust for the purpose of reducing income, estate or gift tax responsibilities.

Fuel tax credit scams

Certain individuals are allowed to take a fuel tax credit, such as farmers who use fuel to run their heavy equipment. Despite the soaring costs of gas, the typical taxpayer cannot take this credit for the day-to-day operation of their motor vehicles.

More from this Contributor:

Think you've found a way to avoid taxes? Think again

New IRS regulations to clean up slapdash tax preparers

Beware of federal tax refund scams