We get absolutely deluged with hundreds of calls a day during tax return filing season about all kinds of fraud, particularly identity related scams and claiming child exemptions improperly.  In 2016, there was a 400% increase in tax related phishing and malware attacks, and 969,000 potentially fraudulent refunds claiming up to $6.5 billion. You may be unaware that you’re a victim until you try to file your taxes and IRS tells you something’s wrong.

Here are four common scams to watch out for this year:

  • Phishing—Fraudsters send fake emails to trick would-be victims into sharing personal data. The real IRS would never initiate contact with you this way.
  • Phone fraud—Identity thieves impersonate IRS agents. But, the real IRS states it will never call to demand immediate payment. You will first receive a mailed bill.
  • Tax preparer fraud—Use tax professionals? Watch out for emails that appear to be from them asking for private information. Delete and call your service directly.
  • Phony IRS agents visit your home—This scam often targets the elderly. Real IRS agents carry photo IDs, and will try to contact you before visiting.

The full list of the recently released “Dirty Dozen” tax scams can be found here.  As for claiming child exemptions improperly, the best defense is a good offence: file early.  Unfortunately, neither of these big problems make for good whistleblower claims under section 7623(b), the IRS whistleblower program we work with.  The Whistleblower Office does not handle the identity theft scams, that is handled by the Treasury Inspector General’s Office.  Claiming of exemptions for children is unfortunately not an issue the Whistleblower Office handles either, that has to be handled directly with the IRS in connection with the filing of your return.

What we do see a lot during tax season that the Whistleblower Office is interested in is non-filing of returns, positions being taken that are clearly non-compliant, abusive transactions, or anything that represents an underpayment of tax of more than $2 million of tax over the last three years.  If you have information about anything you believe may fit in those categories don’t hesitate to give us a call.


The IRS today announced the conclusion of its annual list of the “Dirty Dozen” tax scams.  The list is published each year by the IRS as a way to both inform and warn taxpayers about the most common tax schemes they may encounter especially during filing season.  

This year’s list remains unchanged from last year’s list with familiar tactics such as “Offshore Tax Avoidance,” “Falsely Padding Dedudutions,” and  “Abusive Tax Shelters,” appearing yet again.

With respect to Offshore Tax Avoidance, the IRS noted that numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts, nominee entities, foreign trusts, employee leasing schemes, private annuities, or insurance plans.  The IRS’s release concerning Offshore Tax Avoidance said:

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as bankers and others suspected of helping clients hide their assets overseas.

Commissioner John Koskinen mentioned that the IRS has collected $10 billion in back taxes in recent years. He cited the offshore voluntary disclosure programs and third-party reporting as reasons why it is less likely that offshore financial accounts will go unnoticed by the IRS. 

The IRS’s release on Falsely Padding Deductions focused on warning taxpayers against “the temptation to falsely inflate deductions or expenses. . .”  Some taxpayers are not able to avoid that temptation and they file tax returns with substantially inflated business expenses, costs of goods sold, and in some cases they simply make-up expenses or deductions in an effort to pay less tax or increase their tax refund.  

Finally, the IRS warned of Abusive Tax Shelters for the third year in a row.  More specifically, “micro-captive insurance tax shelters.”  Promoters, accountants, or wealth planners persuade owners of closely held entities to participate in schemes that lack attributes of genuine insurance.  According to the IRS release, “coverages may insure implausible risks, fail to match genuine business needs or duplicate the taxpayer’s commercial coverages.  Premium amounts may be unsupported by underwritring and actuarial analyiss, may be geared toward a desired deduction amount or may be significantly higher than premiums for comparable commercial coverage.” In November of 2016, the IRS released Notice 2016-66 which advised that micro-captive insurance transactions have the potential for tax avoidance or even evasion.

The unscrupulous promoters of these abusive transactions always find new products to promote as the IRS and the Courts crack down on the abuse.  Accordingly, we expect the IRS to continue to pursue the promotors of the latest trends in tax evasion and we expect Abusive Tax Shelters to continue to appear on the Dirty Dozen List.  

If you have knowledge of offshore tax avoidance, substantially infalted tax deductions, or abusive tax structures, contact the tax attorneys at The Ferraro Law Firm to discuss filing a claim for an award for providing the information to the IRS and doing your part to hold tax evaders accountable. 



The IRS released its “Dirty Dozen” list of the worst tax scams of the year this month.  The list is published each year by the IRS as a way to inform and warn taxpayers about the most common tax schemes they encounter during tax season. 

While most of the Dirty Dozen list remains unchanged from 2015, there are a couple of notable changes.  New to this year’s list is “Falsely Padding Deductions.”  In the IRS news release from February 10, 2016, the Service warned taxpayers against the “temptation” to falsely overstate deductions or expenses.  The release specifically calls out the practice of some taxpayers to inflate charitable contributions, or business expenses.  The artificial inflation of business expenses is typically achieved either by overstating expense items throughout the tax year or improperly including, as a deductible business expense, expenses that are actually personal.

Another noteworthy change on the list is the “Excessive Claims for Business Credits.”  This category actually expands last year’s “Excessive Claims for Fuel Credits.”  Where this year’s category is more of a general warning on claiming false credits, the release does highlight “fuel tax credit scams,” and “research credit scams.”  As to the research credit scams, the IRS noted that they see a significant amount of abuse of this credit.  The credit, provided by section 41, incentivizes industry taxpayers to invest in research and experimentation.  However, there are qualifications to achieve the credit.  For example, the credit specifically excludes some activities such as research after commercial production, foreign research, adaptation of an existing business component, and funded research.   Additionally the IRS specified that “qualified research expenses include only in-house research expenses and contract research. Qualified research expenses do not include expenses where it has not been shown that there is a nexus between the claimed expenses and qualified research activity.”

Finally, “Abusive Tax Shelters” made the Dirty Dozen again this year.  IRS Commissioner John Koskinen warned taxpayers about the importance of avoiding “unscrupulous promoters who sell phony tax shelters with no real purpose other than to avoid paying what is owed.”  Contained within this category were “Abusive Tax Structures,” “Misuse of Trusts,” and “Captive Insurance.”  Addressing abusive tax structures, the IRS release noted that multiple flow-through entities are commonly used by taxpayers to “conceal the true nature and ownership of income and assets.”  Along similar lines, the IRS called out certain uses of trusts in estate planning to avoid income tax liability and hide assets from creditors and the IRS.  Lastly, the IRS warned against promoters of captive insurance schemes whereby promoters assist business owners in creating captive insurance companies that sell insurance policies to closely held entities.  The goal of the scheme is to generate up to $1.2 million of premiums annually in order to take improper advantage of an income exclusion. 

As with most things in life, if something appears “too good to be true,” it probably is.  If you have encountered any of these tax schemes or have information pertaining to improper tax avoidance please contact the tax attorneys at The Ferraro Law Firm to discuss filing a claim for an award for providing this information to the IRS.

Each year the IRS publishes a list of common tax scams that taxpayers may encounter during the tax year.  These annual lists serve as a way for the IRS to remind taxpayers to use caution during the tax season to protect themselves against a wide range of schemes.  This year’s list includes abusive tax structures, specifically mentioning misuse of trusts and captive insurance schemes.

Abusive tax structures is a staple of the “Dirty Dozen” list and generally includes any structure that is created to conceal the true nature and ownership of taxable income and/or assets.  These structures range from simple structuring of abusive domestic and foreign trust arrangements to strategies which take advantage of financial secrecy laws of some foreign jurisdictions.  IRS Criminal Investigation has a nationally coordinated program to combat abusive tax structures, which focuses on the identification and investigation of the tax scheme promoters as well as those who play an integral role in facilitating, aiding, assisting, or furthering the abusive tax scheme.  The IRS states that taxpayers should be on the lookout for tax products that are too good to be true, especially where there is a claim of eliminating or substantially reducing your tax liability.  Some things to watch out for are unnecessary steps in transaction and where the form of the transaction does not match the substance of the transaction.

The IRS highlighted abusive captive insurance schemes as an abusive tax structure this year.  Captive insurance companies can and often do serve a legitimate business purpose, a seeming tide of unscrupulous promoters have been abusing the provisions that make these captives feasible.  These promoters often market these captives as bringing something that has long been used by large companies to manage risk and reduce their tax burden to taxpayers of all size.  It has been well established that businesses are able to create captive insurance companies to insure against certain risks.  The insured operating business claims deductions for premiums paid for the insurance policies with the captive insurance company owned by the same owners of the insured.  The tax benefit for this scheme comes from section 831(b), which allows for small insurance companies, whose premium income does not exceed $1.2 million, to elect to be taxed on only the investment income from the pool of premiums.  This functionally allows for the exclusion of up to $1.2 million per year in net written premiums from taxable income by the group of companies.  However, in order to receive the tax benefits the operating business must pay premiums to an actual insurance company for insurance.  The framework for what constitutes insurance requires that there be (1) risk shifting, (2) risk distribution, (3) insurance risk; and (4) whether the arrangement meets commonly accepted notions of insurance. 

A number of unscrupulous promoters market this scheme to closely held businesses and assist these entities in creating captive insurance companies onshore or offshore, drafting organizational documents, and preparing initial filings to state insurance authorities and the IRS.  These promoters often attempt to match the premiums to the amount of income that the business owner would like to shelter from tax, up to $1.2 million, rather than price the premiums according to the actual risk of loss that is being insured.  The promoters often times poorly drafted “insurance” binders and policies to cover ordinary business risks or esoteric, implausible risks for exorbitant “premiums,” often leaving the operating business’s commercial coverage with traditional insurers largely, if not entirely, unchanged.  This leads to no real shifting of insurance risks, two requirements for insurance for Federal income tax purposes, from the insured operating business to the captive insurance company. 

Unscrupulous promoters find new products to promote as the old products are determined to be abusive by the IRS and the courts.  As such, we expect that the IRS will continue to pursue unscrupulous promoters and the latest trends in abusive tax structures.  If you have knowledge of an abusive tax structure, contact The Ferraro Law Firm to discuss filing a claim for an award for providing this information to the IRS.