IRS and DOJ Fight Tax Scams Through Civil and Criminal Proceedings and Outreach

The IRS and Department of Justice (DOJ) are pursing both civil and criminal means to fight tax scams, stated government speakers at the “Discussion of Common Tax Scams” panel of the March 9 Department of Justice Consumer Protection Conference at the Georgetown Law Center. The conference focused on combating consumer fraud in general, for example mortgage fraud, health care fraud, lottery scams and tax fraud. Panel speaker Sallie Cooper, acting director of operations, Criminal Investigation, IRS, said there was a common theme running through each of the types of fraud. “It is becoming so critical to protect your personal information,” she said. Previous panels had discussed the importance of taxpayers keeping their personal information safe from strangers, even within their own homes.

Also present was Carol Ide, civil-criminal coordinator, Tax Division, DOJ. Ide discussed the current practice of the DOJ in favoring parallel proceedings, by first pursuing civil means of shutting down a tax scheme such as return preparer fraud, and then moving forward with the slower criminal prosecution.

Both Cooper and Ides discussed several means taxpayers could use to protect themselves from the common tax schemes listed in the IRS’s 2012 “Dirty Dozen,” released on February 16 (IR-2012-23; TAXDAY, 2012/02/17, I.1). The annual list is meant to prevent taxpayers from falling victim throughout the tax year, and especially during the filing season. Listed schemes that could victimize unsuspecting taxpayers include identity theft, phishing and return preparer fraud. But taxpayers themselves can advance scams by hiding their income offshore, abusing charitable deductions, falsely claiming zero wages or, in the alternative, filing returns showing inflated income or deductible expenses.

Identity Theft

The top scam for 2012 is identity theft, which generally involves identity thieves who take a legitimate taxpayer’s identity and personal information and use it to file a tax return and claim a fraudulent refund. The result is that the legitimate taxpayer will subsequently attempt to file his or her return, only to discover someone else has already filed a return in his or her name. To combat tax identity theft, the IRS has stepped up its internal reviews to spot false tax returns before refunds are issued. In 2011, the IRS protected more than $1.4 billion of taxpayer funds from getting into the wrong hands due to identity theft.

Cooper pointed taxpayers to the IRS website ( for more information. She then warned against phishing, typically involving unsolicited emails or a fake websites posing as legitimate websites in order to lure taxpayers into providing their personal and financial information. “The IRS will generally not send an initial solicitation or request for personal information to a taxpayer, so that should be warning sign right away,” said Cooper.

Ide stated that, since November, the DOJ has pursued and, in many cases, obtained, strong sentences against refund crime perpetrators, including counts for aggravated identity theft. Many of the judgments in the courts had provided restitution to the taxpayer victim, the U.S. Treasury or both. “The courts have been pretty receptive to giving restitution to both categories of victims,” Ide said.

Return Preparer Fraud

Not all taxpayers are innocent victims of return preparer fraud. Some participate in fraudulent return preparation in order to secure a larger refund or lower tax liability. “All taxpayers subject to such scams may not be victims, but when you’re talking about questionable return preparers, you’re ultimately still responsible for what’s on that return,” warned Cooper. “Most of the return preparers are honest and decent, but we’re focusing on the ones who are taking advantage of individuals.”

With 60 percent of U.S. taxpayers hiring paid return preparers, both Cooper and Ide warned them to be careful before signing the completed return. Questions taxpayers should ask include: whether they are getting a larger return than originally expected; and whether the preparer is basing his or her fee on a percentage of the refund. In such cases, unscrupulous preparers would have an incentive to inflate a taxpayer’s refund. “Do not ever sign a blank return and let them fill it in and then mail it in,” said Ide.

“We can deal with [fraudulent preparers] in the federal government in two ways; prosecuting them, because it is a crime. But the other thing we can do…is get a civil injunction against a bad return preparer,” said Ide. “That can frequently be done much more quickly than with a criminal prosecution…. We get a lot of these injunctions by consent.”

Ide stated that, in general, an injunction against a bad preparer requires that he or she notify all clients that he or she had prepared false returns in the past and that theirs might be affected. Additionally, the preparer would have to provide the IRS with a list of all clients, which often would result in the IRS tracking those clients down to audit their returns. Many might be innocent, but others might have participated in the filing of a bogus return.

Free Money

Finally, Cooper discussed “free money” scams, which typically target lower-income taxpayers. Perpetrators often promise nonexistent Social Security refunds or overinflated tax credits. They generally offer bad tax advice in exchange for cash, for example charging taxpayers for filing their returns, which sometimes do not go through.

“One of the best preventative measures is awareness,” said Cooper. “So we do outreach and go talk to people so they are aware these scams are going on.” She stated that taxpayers should think twice about such offers. Additionally, they should be careful not to hand out their Social Security number to anyone if they can help it. She stated that, many times, official forms might have a blank for a Social Security number, but could be processed without it. “The less information you’re able to reveal, the better,” said Cooper.

By Jennifer J. Rodibaugh, CCH News Staff


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