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.