Five Ways to Protect Clients from ‘The Sleazy Six’ Tax Season Scams

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FYI, from CPA-Trendlines publication By Rick Telberg

Internal Revenue Service workers may be chronically understaffed, but they're not stupid. They’ve been in the tax collection business since the Civil War, and the IRS has been harvesting income tax since 1913. It has processed billions of tax returns, and it knows the tricks that taxpayers often try. It also knows the tricks that wanna-be cheats use to exploit the tax system, effectively robbing the honest people who pay what they owe.

For the last three years, the IRS has given a name to the most common schemes to swindle either taxpayers or the nation’s treasury. It calls them “The Dirty Dozen.” This year, half the dozen are scams by third parties that attempt to rip off taxpayers. The other half are taxpayer attempts to effectively rip off their government.

Sleazy tax tactics don’t do a practicing accountant any good. The slime taints the tax pro, and the pro may be put in the very uncomfortable position of having to defend the taxpayer before an IRS agent. This is not the light tax preparers look for at the end of the busy season tunnel. They’re thinking “Bahamas,” not “IRS office.”

Clients who know about the Dirty Half-Dozen will be disinclined to try a trick the IRS is expecting. Sharing the list will go far to ward off problems.

So here are the Sleazy Six of the Dirty Dozen:

1. Excess Claims for Business Credits: The IRS watches for false claims for the fuel tax credit, which is limited to off-road business use, such as farming. Another: misuse of the research credit, which needs to meet certain requirements.

2. Padding Deductions: We all know this one—inflated business expenses, false charitable contributions, child tax credits, and so on. The IRS knows it, too.

3. Falsifying Income to Claim Credits: Con-artist “tax preparers” often suggest inflating income to qualify for Earned Income Tax Credits. Sometimes taxpayers themselves think this one up—as if it’s never been tried before.

4. Abusive Tax Shelters: The IRS knows a shady shelter when it sees one. Ethical practitioners neither offer such shelters nor get talked into them.

5. Frivolous Tax Arguments: Frivolous tax arguments don’t hold up in court, and the penalties usually exceed attempted savings.

6. Offshore Tax Avoidance: The IRS has gotten good at enforcing actions against offshore tax cheats. Clients may want to know about the Offshore Voluntary Disclosure Program for catching up on filing and tax obligations.

It can be awkward to tell a client that a suggested scheme just isn’t going to work. Best thing to do is discourage them before they bring their sleazy scheme into your office.

Use the Dirty Dozen to protect your clients while promoting your practice.

1. Clearly, list the Dirty Dozen in a newsletter or email broadcast.
2. For certain clients, it may be wise to lay out the rules on, say, EITC, CTC, allowable business deductions (especially for home businesses), research credits, etc.
3. Warn clients that con artists may guarantee high refunds by using tactics that the taxpayer, not the tax preparer, would be punished for.
4. Let these warnings be opportunities to contact clients and maintain communication.
5. The IRS would be delighted to find that you’ve helped publicize the Dirty Dozen in your local newspaper and on your website. Why not write an opinion piece or ask to be interviewed?

Clients will be glad their Tax Preparer/CPA has advised them about inappropriate tax returns. The image adds value to the Firm.