03.08.2011

IRS notice warns taxpayers to guard against being misled by unscrupulous individuals trying to persuade them to file false claims for tax credits or rebates.

The US Internal Revenue Service (IRS) has just issued a notice (IR-2011-73) urging taxpayers to ‘‘Avoid Becoming Victims of Tax Scams.‘‘ Their advice seems good for other countries too.

The IRS notice warns taxpayers to guard against being misled by unscrupulous individuals trying to persuade them to file false claims for tax credits or rebates.

The IRS has noted an increase in tax-return-related scams, frequently involving unsuspecting taxpayers who normally do not have a filing requirement in the first place. These taxpayers are led to believe they should file a return with the IRS for tax credits, refunds or rebates for which they are not really entitled.
Most paid tax-return preparers provide honest and professional service, but there are some who engage in fraud and other illegal activities. Unscrupulous promoters deceive people into paying for advice on how to file false claims. Some promoters may charge unreasonable amounts for preparing legitimate returns that could have been prepared for free by the IRS or IRS-sponsored Volunteer Income Tax Assistance partners. In other situations, identity theft is involved.

Taxpayers should be wary of any of the following:

Fictitious claims for refunds or rebates based on excess or withheld Social Security benefits.

Claims that US Treasury Form 1080 can be used to transfer funds from the Social Security Administration to the IRS, enabling a payout from the IRS.

Unfamiliar for-profit tax services teaming up with local religious institutions.

Homemade flyers and brochures implying credits or refunds are available without proof of eligibility.

Offers of free money with no documentation required.

Promises of refunds for ‘‘Low Income – No Documents Tax Returns.‘‘

Claims for the expired Economic Recovery Credit Program or Recovery Rebate Credit.

Advice on claiming the Earned Income Tax Credit, based on exaggerated reports of self-employment income.

In some cases, nonexistent Social Security refunds or rebates have been the bait used by the con artists. In other situations, taxpayers deserve the tax credits they are promised, but the preparer uses fictitious or inflated information on the return, which results in a fraudulent return.

Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file with little or no documentation, have apparently been appearing in community churches around the United States. Promoters are targeting church congregations, exploiting their good intentions and credibility.

Promoters of these scams often prey upon low-income individuals and the elderly. They build false hopes and charge people good money for bad advice. In the end, the victims discover their claims are rejected or the refund barely exceeds what they paid the promoter.

Meanwhile, their money and the promoters are long gone.

The IRS is warning all taxpayers, and those who help others prepare returns, to remain vigilant. If it sounds too good to be true, it probably is.

Anyone with questions about a tax credit or program should visit the www.IRS.gov website, contact the IRS or consult other reputable US tax experts.

For questions about rebates, credit and benefits from other federal agencies, contact the relevant agency directly for accurate information.

What about Israel?

The National Insurance Institute is administered separately from the Israel Tax Authority, making it hard to play one off against the other.

The ITA scrutinizes all tax-refund claims.

Personal tax returns now must be filed not only online, but also the old-fashioned way on paper tax returns at your local tax office.

Everything claimed must be supported by relevant external documentation.

For example, if you claim a tax credit for donations to charities, make sure you submit a receipt from them and that they are approved by the ITA under Section 46 of the Income Tax Ordinance.

Also beware of people peddling generous Israeli tax rulings. The tax law does allow you to request an advance tax ruling, but the ITA has instituted detailed procedures for checking out the validity of requests made and the legality of any ruling issued. This follows a number of recent scandals relating to tax rulings.

For example, if you undertake a number of securities transactions that might be considered to generate trading income (up to 45 percent income tax plus NII payments) or capital gains (typically taxed at 20% and no NII), don‘t expect to obtain a compromise tax rate of, say, 32.5%; there‘s no such tax rate in the law.

In the area of trusts, it seems that some advisers have apparently persuaded people to pay them fees to obtain an Israeli tax ruling they didn‘t really need, as the law allowed what they wanted anyway. One way to detect this is to ask for all your options to be presented to you before embarking on a tax-ruling application.

As always, consult experienced tax advisers in each country at an early stage in specific cases.

leon@hcat.co

Leon Harris is a Certified Public Accountant and tax specialist at Harris Consulting & Tax Ltd.