Drew Darmon (R) and his wife Erika Darmon (L) look on as they receive tax preparation assistance from a tax preparer at Liberty Tax in San Francisco, California.
Every tax season the Internal Revenue Service puts out a list called the "Dirty Dozen" which ranks the worst tax schemes of the year. In 2013, identity theft is the dirtiest of them all. The U.S. Treasury Inspector General for Tax Administration says identity theft could cost the IRS $21 billion over the next five years.
"There's a shift in some organized crime from drugs to tax-ID theft, and the increased use of electronic filing may contribute as well," says the Federal Trade Commission's Lisa Schifferle. Her agency does consumer outreach on the issue.
This is how the tax scheme might go: Someone steals your Social Security number, files a tax return on your behalf, and then collects your refund. It takes a victim nearly 200 days on average to get the refund they deserve from the IRS.
"They're ripping their hair out," says Adam Levin, chairman of the identity recovery company IDentity Theft 911. "This is an extremely difficult situation."
Congress is considering a law to force the IRS to move faster. But according to Levin, the problem is too big.
"If you're on the wrong database at the wrong moment when the wrong person gains access, you're toast," he says.
The IRS says it has more than doubled its staff -- to more than 3,000 employees -- working on identity theft this year.
The IRS "Dirty Dozen" list of tax scams for 2013:
1. Identity theft: Identity theft occurs when someone uses your personal information such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes.
2. Phishing: A scam typically carried out with an 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.
3. 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 preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.
4. Hiding Income Offshore: Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.
5. “Free Money” from the IRS: Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches around the country. These schemes promise refunds to people who have little or no income and normally don’t have a tax filing requirement.
6. Impersonation of Charitable Organizations: Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers.
7. False/Inflated Income and Expenses: Including income that was never earned, either as wages or as self-employment income in order to maximize refundable credits, such as the Earned Income Tax Credit, is another popular scam.
8. False Form 1099 Refund Claims: In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return.
9. Frivolous Arguments: Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid.
10. Falsely Claiming Zero Wages: 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 may also submit a statement rebutting wages and taxes reported by a payer to the IRS.
11. Disguised Corporate Ownership: Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business. These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering and financial crimes.
12. Misuse of Trusts: While there are legitimate uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes.