Identity Thieves Target Uncle Sam

Identity thieves seem to like to target the government. With April 15th nearing, the news is awash with fraudsters using other people's identities to claim an earned income tax credit worth thousands of dollars. Of course, we should feel sorry for the poor people, who had their identity stolen and used to file a bogus return. After all, they will have to deal with IRS, and prove they didn't file the fraudulent paperwork.

The saddest thing is that they will probably find out about it when they file a legitimate tax return, and it is denied. When this happens, they might have to prove, that they were not the person responsible for filing the faux (fake) return. In most instances, proving this will be hours of work and cost a little money.

In all fairness, it is evident that the IRS is taking tax fraud much more seriously than in the past. Because of this, we are probably seeing more of it being reported. The IRS has an excellent information page on their site to assist the people being victimized. Please note that anyone paying taxes is a victim of all this, and the money being lost, adds to the ever-growing deficit.

Another aspect of this fraud is that if the government can prove the refund was not negotiated for the right person, they can hold the financial institution paying out the money liable. Frequently when the fraudulent refund is received a counterfeit ID is produced to negotiate the instrument. In these cases, when the true person proves they did not file the bogus return, the loss is going to be charged right back to the financial institution that paid out the actual cash in the scheme.

Another good example of a government program being targeted is the recent disclosure that hackers compromised a State of Utah Medicaid database. Given the quality of information stolen (medical), it is prime to commit tax fraud (or medical fraud) against the government.

Current estimates put this data breach at 780,000 personal records compromised. It has also come to light that the data was not encrypted and that less than complex passwords were used to protect it. The Salt Lake City Tribune is also reporting that the manner in which this information was protected might be in violation of current federal regulations. Hard to believe with the number of publicly disclosed breaches that the data was not encrypted. You would think that this would be standard by now when protecting information that criminals can steal money with?

Pretty interesting that the World Privacy Forum is showing an interactive map on their site showing all the known occurrences of medical identity theft in recent years. While there are differing estimates on the costs of medical fraud, there is little doubt that it costs us billions of dollars, and the costs are passed on to all of us.

An article by Jaikumar Vijayan at ComputerWorld makes a pretty good argument that most of the data breaches in 2011 were avoidable. If this is the case, it should show us that this is an ever-growing problem and that we cannot afford to let our guard down.

If you think you might be a victim in the Utah breach, the State has set up a victim's assistance line at 1-855-238-3339.

UC Irvine Staff Nails ID Thief in Texas

A former UnitedHealthCare worker, who stole the personal and financial information of at least 1100 University of California, Irvine students has been arrested in Dallas, Texas.

Michael Tyrone Thomas, of Fort Worth, was arrested at his home and is being held on $300,000 bail. The authorities are alleging Thomas stole the information while working at UnitedHealthCare in December 2007. They are also charging that Thomas used the information to fill out fraudulent tax returns using 163 identities stolen in the caper.

According to the Houston Chronicle, a spokesman for UnitedHealthCare didn't return their call concerning the arrest on Friday. I went to the UnitedHealthCare site and found nothing mentioned about this case as of this writing.

It appears that the investigation was initiated by the UC Irvine Police after students started complaining about identity theft in March. Specifically, they complained about someone using their information to fill out bogus tax returns. University computer experts took a look at their systems and found no signs of a breach. Subsequently, University Police investigating the case discovered all the students were enrolled in a insurance program administered by UnitedHealthCare.

A press release on the UC Irvine site gave credit to UCI Police Sergeants Tony Frisbee, Shaun Devlin and Corporal Caroline Altamirano for working closely on the case with the Dallas District Attorney's Office. The release indicates that they expect additional arrests and that the IRS will be investigating the tax fraud implications in the case.

Recently, the National Taxpayer Advocate, issued a report to Congress indicating that tax fraud involving the use of stolen identities has grown 644 percent in the past four years. In a lot of these cases, forged W-2's are used to claim an earned income credit, which can net the fraudster thousands of dollars per return.

In my post on this story, I mentioned that the IRS has a dedicated page to assist identity theft victims when their information has been used to commit tax fraud. The Houston Chronicle article mentioned that UnitedHealthCare will be offering free credit monitoring and that UCI will be offering loans to the affected students. It also mentioned that UCI Police Chief, Paul Henisey doesn't think the rest of the names were used because the reports of identity theft dropped off in late June.

Free credit monitoring seems to be the standard offer to victims when a data breach is disclosed, but it doesn't necessarily reveal all forms of identity theft. Credit bureaus do not track what information is being used to file a tax return and would be worthless in the already known cases. Other examples when credit monitoring might not be the end-all solution to identity theft protection are medical benefit fraud, employment fraud, government benefit fraud, some forms of check fraud and last, but not least, when it is used to commit crimes of other than a financial nature.

If I were one of the affected UC Irvine students, I wouldn't turn down the free credit monitoring (it does help in a lot of instances), but I would also visit the Identity Theft Resource Center's Financial Identity Theft - More Complex Cases page to educate myself a little further.

So far as Chief Henisey's prediction that this case is over -- I certainly hope it is -- but it wouldn't be prudent for everyone to let their guard down just yet. Information is bought and sold in a lot of places (including over the Internet) for the purpose of identity theft. There is no way of telling, whether or not, any of this information was passed to someone else for a profit.

Saying that, it's refreshing to see the culprit caught in this case and the UC Irvine Police Department (along with other University staff) did an excellent job in their investigation. It isn't very often when one of these cases is traced to the person behind it.

Stolen Identities Used to File Tax Returns Grows 644 percent

The latest news in the identity theft arena is a statistic showing that IRS related identity theft has grown 644 percent in the past four years.

Nina Olson, the National Taxpayer Advocate, warned Congress in a report that identity theft is becoming one of the biggest issues facing taxpayers today. The two main reasons cited were identities stolen to file fraudulent refunds and to obtain employment.

As more pressure is being placed on employers to ensure their employees have a social security number that matches a name, more illegal immigrants are using an identity that matches the social security number on their employment records. No-match legislation, which was introduced by the Department of Homeland Security has been held up in a Federal Court, but some States are taking matters into their own hands. I also read an interesting article in the Twin Cities Daily Planet indicating that these letters are already causing action to be taken at some employers.

Prior to no-match legislation, anyone could simply make up a social security number and it would pass muster for employment reasons.

No matter what side of the fence someone is on from a political perspective, these no-match letters are likely to increase the amount of identity theft we are seeing in regards to tax returns. With all the stolen personal information and counterfeit documents being sold by organized criminals -- it probably isn't going to be hard to use someone else's identities for employment reasons. Stolen identities are available in a lot of places (including the Internet) and counterfeit documents are hawked on street corners across the country.

Another thing I've written about is the increasing amount of fraud being seen using the earned income credit to get a quick refund using someone else's information. The Earned Income Credit -- which is designed as a windfall of several thousand dollars for lower income people -- is easily manipulated by individuals and on a larger scale, by dishonest tax preparers to scam the IRS.

Last year, a large Jackson Hewitt franchisee was charged by the Justice Department for (allegedly) encouraging this type of fraud. Dishonest tax preparers often recruit low income people to used a forged W-2 (forms are easily available in Office Supply Stores) and get a quick refund of thousands of dollars. In other cases, this is also done using stolen identities, causing the legitimate person a lot of heartache when they go to file their return. Ironically, in years past, there have even been reports of this type of fraud being committed by prisoners who weren't being monitored, very well!

Easily available W-2 blanks and the seeming inability of the IRS to verify payroll information are two of the enabling factors of this type of fraud.

The recent report indicates that the IRS will start using a computer program to identify potential identity theft cases next year. It is also considering establishing an office to assist identity theft victims.

Olsen also plans to monitor the use of private debt collectors by the IRS, carefully. The reasons cited are a lack of transparency on the procedures used by these agencies and the potential for people's rights to be violated by these agencies.

Stories of identity theft victims being harassed by collections agencies for debts they were not responsible for are well documented and have caused innocent people a lot of pain and suffering.

Another thing to consider is that since this type of identity theft normally doesn't show up on a credit bureaus very quickly, we probably have a lot of people purchasing identity theft protection that will not necessarily detect the fact that they have become a victim. The Identity Theft Resource Center has information on how to check if your social security number is being used and what to do about it. The IRS also has a page on their site on how to deal with this issue.

The IRS also offers more information on their site about the Taxpayer Advocate Service and how they can assist the average person.

All in all, I consider this report timely and an issue that needs to be taken seriously given an already exploding statistic and the potential for this phenomenon to grow.

Report challenges IRS that it is not doing enough to protect taxpayers from identity theft

According to a recently released report by the Inspector General for Tax Administration, the IRS is falling behind on a problem that has increased almost 600 percent in the past five years, controlling the use of stolen identities to file tax returns.

Most of the identity theft referred to in this report is when someone's personal information is stolen to maintain employment.

Here is the synopsis from the report:

The IRS has not placed sufficient emphasis on employment-related and tax fraud identity theft strategies. Specifically, its prevention strategy does not include pursuing individuals using another person’s identity, unless their cases directly relate to a substantive tax or conspiracy violation. IRS policy is that the actual crime of identity theft will only be investigated by the Criminal Investigation Division if it is committed in conjunction with other criminal offenses having a large tax effect.

Here is how the Inspector General came up with these numbers:

During Calendar Years 2005 and 2006, the Federal Trade Commission received 92,570 taxpayer complaints related to employment-related and tax fraud identity theft. Due to the lack of IRS information related to identity theft, it is not clear whether the Criminal Investigation Division evaluated or investigated any of these complaints. According to the IRS, the Criminal Investigation Division does not use the Federal Trade Commission Identity Theft Clearinghouse data, and any identity theft prosecution recommendations would have been developed from other
sources.

The report goes on to say that in past two years out of the 92,570 cases reported only about 100 were prosecuted.

Another interesting aspect of the report is that only no match cases (where a name and SSN do not match) are reported to the employer:

Employers are notified of mismatches between names and Social Security Numbers. However, if both a taxpayer’s name and Social Security Number are used by another person, employers are not notified and no further action is taken to stop the continued unlawful use of the identity.

This ties in with the no match social security number legislation that the Department of Homeland Security is trying to enact. As of right now, anyone can use someone else's or even a made up social security number and remain employed. There are few to no consequences for the identity thief, or the employer, who chooses to look the other way.

The new law would force employers to take action, but has been held up in Federal court at the behest of several civil liberties groups. Ironically, many of the cases I've read about involved a citizen of Hispanic American heritiage having their identity stolen.

In August of last year, I wrote about a financial crimes detective, Adrian Flores having his identity stolen. Before clearing his good name, Detective Flores went through a lot of pain and suffering when the IRS came after him for back taxes. He also had to deal with a slew of collection agencies coming after him for unpaid debts using his stolen identity.

Sadly enough, it appears that the groups blocking this legislation don't take the victims rights into consideration (my opinion). I'm all for protecting individual rights, but we need to consider the people getting their identities stolen, also.

Who is protecting their civil liberties?

Most Americans have nothing against hard working immigrants, but many of us have become weary with all the crime that hides itself in it's mass. There isn't going to be an easy answer to this issue, but we need to remove the factors that enable crime to camouflage itself within the problem, too easily.

Full report by the Inspector General for Tax Administration, here.

Latest press release from DHS about the impending (highly controversial) law, here.

The Dirty Dozen Tax Scams of 2008

The IRS has been in the news recently because it's name has been impersonated (spoofed) to phish personal and financial information from people tricked into believing the IRS was going to send them money.

Another recent phishing lure spoofing the IRS name was the upcoming economic stimulus package being promised to the tax paying public. In this case, (too good to be true) promises of money were being sent out by spam spewing zombie computers before the details were finalized in the halls of Congress.

These spam spewing zombie computers are part of a botnet. Botnets are controlled by bot-herders, who are known to rent their services to a wide variety of Internet misfits. Bot-herders often use their botnets to commit criminal activity themselves, also.

Zombie computers are created after their owner clicks on a link in a spam e-mail containing malicious software engineered to take control of their system. In the recent past, there have even been examples of malware being injected into a system after just visiting an infected site.

Please note that most of these phishing ploys are designed to clean out your bank account, run up your credit cards, and or allow a criminal to use your good name to obtain additional lines of credit. The fact that they often turn your computer into a zombie is considered an add-on value to the criminal, who can then use your system to deliver spam (scams) to other unsuspecting people.

Today, the IRS issued it's yearly Dirty Dozen Tax Schemes. Since Internet scammers have been so fond of using the IRS's name, I thought this would be a good subject to blog about.

Please note that from time to time, I get anonymous inquiries about where to report tax fraud in the comments section. I've included information oh how to do this at the bottom if this post.

The IRS is sometimes willing to pay a reward for information leading to the successful resolution of an investigation. Your identity is protected if you choose to remain anonymous, also.

From the press release:

The Internal Revenue Service today issued its 2008 list of the 12 most egregious tax schemes and scams, highlighted by Internet phishing scams and several frivolous tax arguments.

Topping this year’s list of scams is phishing, which encompasses numerous Internet-based ploys to steal financial information from taxpayers. New to the “Dirty Dozen” this year is a scheme, which IRS auditors discovered, that relates to unreasonable and/or excessive fuel tax credit claims.

Here is the Dirty Dozen hot off the official press release:

1. Phishing

Phishing is a tactic used by Internet-based thieves to trick unsuspecting victims into revealing personal information they can then use to access the victims’ financial accounts. These criminals use the information obtained to empty the victims’ bank accounts, run up credit card charges and apply for loans or credit in the victims’ names. Phishing scams often take the form of an e-mail that appears to come from a legitimate source. Some scam e-mails falsely claim to come from the IRS. To date, taxpayers have forwarded more than 33,000 of these scam e-mails, reflecting more than 1,500 different schemes, to the IRS. The IRS never uses e-mail to contact taxpayers about their tax issues. Taxpayers who receive unsolicited e-mail that claims to be from the IRS can forward the message to a special electronic mailbox, phishing@irs.gov, using instructions contained in an article titled “How to Protect Yourself from Suspicious E-Mails or Phishing Schemes.” Remember: the only official IRS Web site is located at www.irs.gov.

2. Scams Related to the Economic Stimulus Payment

Some scam artists are trying to trick individuals into revealing personal financial information that can be used to access their financial accounts by making promises relating to the economic stimulus payment, often called a “rebate.” To obtain the payment, eligible individuals in most cases will not have to do anything more than file a 2007 federal tax return. But some criminals posing as IRS representatives are trying to trick taxpayers into revealing their personal financial information by falsely telling them they must provide information to get a payment. For instance, a potential victim is told by phone or e-mail that he or she is eligible for a rebate but must provide a bank account number (or similar information) to get the payment. If the target is unwilling, the victim is then told that he cannot receive the rebate unless the information is provided. Individuals should remember that the only way to get a stimulus payment is to file a 2007 tax return. The IRS urges taxpayers to be extra-vigilant. The IRS will not contact taxpayers by phone or e-mail about their stimulus payment.

3. Frivolous Arguments

Promoters of frivolous schemes encourage people to make unreasonable and unfounded claims to avoid paying the taxes they owe. Most recently, the IRS expanded its list of frivolous legal positions that taxpayers should stay away from. Taxpayers who file a tax return or make a submission based on one of these positions on the list are subject to a $5,000 penalty. The most recent update of the list of frivolous positions includes: misinterpretation of the 9th Amendment to the U.S. Constitution regarding objections to military spending, erroneous claims that taxes are owed only by persons with a fiduciary relationship to the United States, a nonexistent “Mariner’s Tax Deduction” related to invalid deductions for meals and the misuse of the fuel tax credit (see below). The complete list of frivolous arguments is on the IRS Web site at IRS.gov.

4. Fuel Tax Credit Scams

The IRS is receiving claims for the fuel tax credit that are unreasonable. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit was recently added to the list of frivolous tax claims, potentially subjecting those who improperly claim the credit to a $5,000 penalty.

5. Hiding Income Offshore

Individuals continue to try to avoid paying U.S.taxes by illegally hiding income in offshore bank and brokerage accounts or using offshore debit cards, credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance plans. The IRS and the tax agencies of U.S. states and possessions continue to aggressively pursue taxpayers and promoters involved in such abusive transactions.

6. Abusive Retirement Plans
The IRS continues to uncover abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to Roth IRAs. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into Roth IRAs or companies owned by their Roth IRAs at less than fair market value. In one variation of the scheme, a promoter has the taxpayer move a highly appreciated asset into a Roth IRA at cost value, which is below annual contribution limits even though the fair market value far exceeds the amount allowed.

7. Zero Wages

Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS. Sometimes fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme.

8. False Claims for Refund and Requests for Abatement

This scam involves a request for abatement of previously assessed tax using Form 843, “Claim for Refund and Request for Abatement.” Many individuals who try this have not previously filed tax returns. The tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program. The filer uses Form 843 to list reasons for the request. Often, one of the reasons given is "Failed to properly compute and/or calculate Section 83-Property Transferred in Connection with Performance of Service."

9. Return Preparer Fraud

Dishonest tax return preparers can cause many problems for taxpayers who fall victim to their schemes. These scam artists make their money by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Some preparers promote the filing of fraudulent claims for refunds on items such as fuel tax credits to recover taxes paid in prior years. Taxpayers should choose carefully when hiring a tax preparer, especially one who promises something that seems too good to be true.

10. Diguised Corporate Ownership

Some people are going as far as forming domestic shell corporations in certain states for the purpose of disguising the ownership of a business or financial activity. Once formed, these anonymous entities can be used to facilitate underreporting of income, non-filing of tax returns, engaging in listed transactions, money laundering, financial crimes and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance.

11. Misuse of Trusts

For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. They promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. However, some trusts do not deliver the promised tax benefits. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust.

12. Abuse of Charitable Organizations and Deductions

The IRS continues to observe the misuse of tax-exempt organizations. Misuse includes arrangements to improperly shield income or assets from taxation, attempts by donors to maintain control over donated assets or income from donated property and overvaluation of contributed property. In addition, IRS examiners are seeing an upturn in instances where taxpayers try to disguise private tuition payments as contributions to charitable or religious organizations.

As promised above, here is how you can report one of these scams:

Suspected tax fraud can be reported to the IRS using IRS Form 3949-A, Information Referral. Form 3949-A is available for download from the IRS Web site at IRS.gov. The completed form or a letter detailing the alleged fraudulent activity should be addressed to the Internal Revenue Service, Fresno, CA 93888. The mailing should include specific information about who is being reported, the activity being reported, how the activity became known, when the alleged violation took place, the amount of money involved and any other information that might be helpful in an investigation. The person filing the report is not required to self-identify, although it is helpful to do so. The identity of the person filing the report can be kept confidential.

Whistleblowers also could provide allegations of fraud to the IRS and may be eligible for a reward by filing Form 211, Application for Award for Original Information, and following the procedures outlined in Notice 2008-4, Claims Submitted to the IRS Whistleblower Office under Section 7623.

Full press release on the 2008 Dirty Dozen Scams, here.

Is tax fraud being enabled by too many dishonest preparers?

In February, I wrote about fraudulent tax returns being filed using forged W-2s.

Another story recently surfaced from the SF Bay area, where Jackson Hewitt preparers were complaining this seasonal type of fraud is getting out of control.

Kate Williamson (Examiner) wrote:

If successful, the fraud allows tax cheats to receive thousands of dollars, either from the federal government or from companies making tax refund anticipation loans. It is sometimes coupled with identity theft, which can create problems for law-abiding citizens when they go to file their own taxes.

Kate Williamson article, here.

Interestingly enough, Jackson Hewitt preparers were quoted for this story and in another story - a lot of Jackson Hewitt franchises are being taken to task by the Justice Department for (allegedly) committing tax fraud, themselves.

The AP (courtesy of CNN) is reporting:

The franchises were either totally or partially owned by Farrukh Sohail, the Justice Department said, and involved "a pervasive and massive series of tax-fraud schemes," according to court filings.

Sohail and other defendants "created, directed, fostered, and maintained a business environment" at the Jackson Hewitt franchises "in which fraudulent tax return preparation is encouraged and flourishes," according to court documents.

Employees were encouraged to ignore telltale signs of fraudulent information and to file claims even when it was obvious customers were using fake W-2 forms or false
deductions.

A sample of returns prepared by franchises connected to Sohail found 31 percent contained false information such as phony earned income tax credit claims, bogus deductions and fraudulent W-2 forms.

AP story, here.

Dishonest tax preparers and people using forged W-2 forms is nothing new. In the past couple of years, there were even stories about this being done by prisoners. W-2 blanks are easily purchased at office supply stores, or over the Internet.

This phenomenon is probably being enabled by large payouts for what is known as the earned income tax credit and a huge business in refund anticipation loans. Refund anticipation loans often carry a triple digit interest rate, when considering the term (normally less than a month).

The AP article states that the dishonest franchises cost the government $70 million and this represents about 2 percent of Jackson Hewitt's business.

Some believe, the huge business in refund anticipation loans, has been inspired by the large dollar refunds lower income people get based on the earned income tax credit.

Currently, our tax gap (yearly difference between what is taken in and paid out) is 354 billion, according to the AP article.

Maybe, we need a better way to verify that W-2s are legitimate?

We can all help the IRS if we suspect tax fraud by reporting it, here.

Someone is going to say, we spend too much time going after the poor (people filing for earned income tax credits). Before they do, I would like to point out that in the instance cited, the Justice Department seems to be going after an "enabler" (Jackson Hewitt).

With our resources coming up $354 billion short every year, we can't afford to keep looking the other way on issues, such as these. The result will be more taxes to pay for needed government services.

Another problem is that a lot of the criminals doing this are using other people's information (identity theft). A lot of people are filing their taxes - only to discover someone else has already gotten a refund using their name.

From what I hear, this can be pretty hard and (painful) to clean up, once it occurs.

Of course, this isn't the only type of tax fraud being committed. A great place to learn all about the various schemes is Quatloos.com, which can be read by linking, here.

Tax Refund Loans attract fraudsters

There are a lot of people trying to scam tax preparers and the government.

Part of the problem is that W-2 forms are easily purchased at just about any Office Supply store and forged.

KGO, San Francisco (Alan Wong) reports:

The latest trend in tax fraud has made its way to the Bay Area and it could be costing the federal government millions.

People are being enticed to cheat Uncle Sam and then split the take.

The goal is to get these tax preparers to give them a loan (refund anticipation type) and walk out with about $6,000 - $8,000 in cash.

Fraudsters recruit low income/unemployed people to go in with the forged W-2s and get these loans.

KGO story, here.

Of course, those who get recruited will end up holding the bag if the IRS discovers this happening and takes the matter for prosecution. My guess is the people recruited will bear the brunt of any punishment because their information is being used, and the fraudsters (recruiters) will disappear in the mist.

These recruiters can be reported to the IRS, here. Of note, they mention that anyone reporting criminal activity might be entitled to a reward.

Here is a previous post, which covers all the scams the IRS looks for this time of year:

Don't be lured with promises of something too good to be true when filing your taxes

Identity theft is also becoming an issue when people try to file their taxes. A lot more than W-2s are being counterfeited these days.

News 25 (Peoria) is reporting how people are going to file their taxes and discovering someone else has already filed using their social security number.

News 25 story, here.

I wonder who will be liable for all the problems a taxpayers faces if their identity is stolen, and someone issues one of these handy dandy refund anticipation loans to a fraudster?

Unfortunately, my guess is that the identity theft victim will suffer the most.

Clearing up problems with the IRS can be a painful experience.

Don't be lured with promises of something too good to be true when filing your taxes

Tax season brings with it all kinds of fraud. A lot of immoral sorts try to get someone to fall for something that's too good to be true. They get away with it because people are afraid of what they might owe, or they take advantage of what I call the "greed factor."

One thing is certain, if you fall for their promises, you're going to be left holding the bag. This means financial hardship (at a minimum) and could mean incarceration (jail).

I firmly believe that education is the best weapon against fraud. And the best places to educate yourself about tax fraud is none other than the IRS website, itself.

They keep a close eye on trends involving tax fraud and publish the information for free.

On February 7th, they published the 2007 "Dirty Dozen Tax Scams."

Here are the 12 most prevalent scams, according to the IRS:

1. Zero Wages. In this scam, new to the Dirty Dozen, a taxpayer attaches to his or her return either a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 that shows zero or little wages or other income. The taxpayer may include a statement indicating the taxpayer is rebutting information submitted to the IRS by the payer. An explanation on the Form 4852 may cite "statutory language behind IRC 3401 and 3121" or may include some reference to the paying company refusing to issue a corrected Form W-2 for fear of IRS retaliation. The Form 4852 or 1099 is usually attached to a “Zero Return.” (See number four below.)

2. Form 843 Tax Abatement. This scam, also new to the Dirty Dozen, rests on faulty interpretation of the Internal Revenue Code. It involves the filer requesting abatement of previously assessed tax using Form 843. Many using this scam have not previously filed tax returns and the tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program. The filer uses the Form 843 to list reasons for the request. Often, one of the reasons is: "Failed to properly compute and/or calculate IRC Sec 83––Property Transferred in Connection with Performance of Service."

3. Phishing. Phishing is a technique used by identity thieves to acquire personal financial data in order to gain access to the financial accounts of unsuspecting consumers, run up charges on their credit cards or apply for new loans in their names. These Internet-based criminals pose as representatives of a financial institution and send out fictitious e-mail correspondence in an attempt to trick consumers into disclosing private information. Sometimes scammers pose as the IRS itself. In recent months, some taxpayers have received e-mails that appear to come from the IRS. A typical e-mail notifies a taxpayer of an outstanding refund and urges the taxpayer to click on a hyperlink and visit an official-looking Web site. The Web site then solicits a social security and credit card number. In a variation of this scheme, criminals have used e-mail to announce to unsuspecting taxpayers they are “under audit” and could make things right by divulging selected private financial information. Taxpayers should take note: The IRS does not use e-mail to initiate contact with taxpayers about issues related to their accounts. If a taxpayer has any doubt whether a contact from the IRS is authentic, the taxpayer should call 1-800-829-1040 to confirm it.

4. Zero Return. Promoters instruct taxpayers to enter all zeros on their federal income tax filings. In a twist on this scheme, filers enter zero income, report their withholding and then write “nunc pro tunc”–– Latin for “now for then”––on the return. They often also do this with amended returns in the hope the IRS will disregard the original return in which they reported wages and other income.

5. Trust Misuse. For years unscrupulous promoters have urged taxpayers to transfer assets into trusts. They promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. However, some trusts do not deliver the promised tax benefits, and the IRS is actively examining these arrangements. There are currently more than 200 active investigations underway and three dozen injunctions have been obtained against promoters since 2001. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust.

6. Frivolous Arguments. Promoters have been known to make the following outlandish claims: the Sixteenth Amendment concerning congressional power to lay and collect income taxes was never ratified; wages are not income; filing a return and paying taxes are merely voluntary; and being required to file Form 1040 violates the Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy. Don’t believe these or other similar claims. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.

7. Return Preparer Fraud. Dishonest return preparers can cause many headaches for taxpayers who fall victim to their schemes. Such preparers derive financial gain by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Taxpayers should choose carefully when hiring a tax preparer. As the old saying goes, “If it sounds too good to be true, it probably is.” And remember, no matter who prepares the return, the taxpayer is ultimately responsible for its accuracy. Since 2002, the courts have issued injunctions ordering dozens of individuals to cease preparing returns, and the Department of Justice has filed complaints against dozens of others. During fiscal year 2005, more than 110 tax return preparers were convicted of tax crimes.

8. Credit Counseling Agencies. Taxpayers should be careful with credit counseling organizations that claim they can fix credit ratings, push debt payment plans or impose high set-up fees or monthly service charges that may add to existing debt. The IRS Tax Exempt and Government Entities Division is in the process of revoking the tax-exempt status of numerous credit counseling organizations that operated under the guise of educating financially distressed consumers with debt problems while charging debtors large fees and providing little or no counseling.

9. Abuse of Charitable Organizations and Deductions. The IRS has observed increased use of tax-exempt organizations to improperly shield income or assets from taxation. This can occur, for example, when a taxpayer moves assets or income to a tax-exempt supporting organization or donor-advised fund but maintains control over the assets or income, thereby obtaining a tax deduction without transferring a commensurate benefit to charity. A “contribution” of a historic facade easement to a tax-exempt conservation organization is another example. In many cases, local historic preservation laws already prohibit alteration of the home’s facade, making the contributed easement superfluous. Even if the facade could be altered, the deduction claimed for the easement contribution may far exceed the easement’s impact on the value of the property.

10. Offshore Transactions. Despite a crackdown by the IRS and state tax agencies, individuals continue to try to avoid U.S. taxes by illegally hiding income in offshore bank and brokerage accounts or using offshore credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance to do so. The IRS and the tax agencies of U.S. states and possessions continue to aggressively pursue taxpayers and promoters involved in such abusive transactions. During fiscal 2005, 68 individuals were convicted on charges of promotion and use of abusive tax schemes designed to evade taxes.

11. Employment Tax Evasion. The IRS has seen a number of illegal schemes that instruct employers not to withhold federal income tax or other employment taxes from wages paid to their employees. Such advice is based on an incorrect interpretation of Section 861 and other parts of the tax law and has been refuted in court. Lately, the IRS has seen an increase in activity in the area of “double-dip” parking and medical reimbursement issues. In recent years, the courts have issued injunctions against more than a dozen persons ordering them to stop promoting the scheme. During fiscal 2005, more than 50 individuals were sentenced to an average of 30 months in prison for employment tax evasion. Employer participants can also be held responsible for back payments of employment taxes, plus penalties and interest. It is worth noting that employees who have nothing withheld from their wages are still responsible for payment of their personal taxes.

12. “No Gain” Deduction. Filers attempt to eliminate their entire adjusted gross income (AGI) by deducting it on Schedule A. The filer lists his or her AGI under the Schedule A section labeled “Other Miscellaneous Deductions” and attaches a statement to the return that refers to court documents and includes the words “No Gain Realized.”

Two items fell off the list this year:

Two noteworthy scams have dropped off the “Dirty Dozen” this year: “claim of right” and “corporation sole.” IRS personnel have noticed less activity in these scams over the past year following court cases against a number of
promoters.

Dirty Dozen press release, here.

If you are a victim of one of these scams, you can report it, here.

Notably, they mention that reporting a scam might qualify you for a reward, but reporting one of these scams might (also) prevent someone else from becoming victimized.

There is also a lot of other free information and tools to do your taxes on the main IRS website, here.

IRS Renews Phishing Awareness Campaign

The IRS is reacting to recent phishing attempts, which are designed to steal people's personal information. Once stolen, this information is normally used in "identity theft" schemes, but they could be used by illegal immigrants (or in theory) terrorists.

In a recent release from the IRS site:

The IRS saw an increase in complaints in recent weeks about these e-mails, which are designed to trick the recipients into disclosing personal and financial information that could be used to steal the recipients’ identity and financial assets.

“The IRS does not send out unsolicited e-mails asking for personal information,” said IRS Commissioner Mark W. Everson. “Don’t be taken in by these criminals.”

The IRS has seen a recent increase in these scams. Since November, 99 different scams have been identified, with 20 of those coming in June – the most since 40 were identified in March during the height of the filing season.

Many of these schemes originate outside the United States. To date, investigations by the Treasury Inspector General for Tax Administration have identified sites hosting more than two dozen IRS-related phishing scams. These scam Web sites have been located in many different countries, including Argentina, Aruba, Australia, Austria, Canada, Chile, China, England, Germany, Indonesia, Italy, Japan, Korea, Malaysia, Mexico, Poland, Singapore and Slovakia, as well as the United States.

If you get any of these e-mails, the IRS requests that you forward them to phishing@irs.gov. I highly recommend that you do so - the IRS seems to be actively investigating them.

For the full news release: Click Here.

Here is a story from SmartMoney.com about illegal immigrants using people's personal information.

In another vein, here is a story (released in March by the Washington Post) about how tax preparers are trying to "legally" sell information from people's tax returns.

Sadly enough, my personal belief that the current "identity theft" crisis has (in part) been spawned by the mass gathering of people's personal information for marketing purposes.