The IRS said including income that was never earned, either as wages or as self-employment income in order to maximize refundable credits, is another popular scam. It's a move that could have serious repercussions because you could wind up repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.
Also, people file excessive claims for the fuel tax credit and it can result in a $5,000 penalty.
False Form 1099 Refund Claims
The IRS said people make refund claims on the false theory that the federal government maintains secret accounts for U.S. citizens and that they can gain access to the accounts by issuing 1099-OID forms to the IRS.
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.
The IRS said don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns.
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. Taxpayers have the right to contest their tax liabilities in court.
Falsely Claiming Zero Wages
Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. 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.
Disguised Corporate Ownership
The IRS said, third parties can be improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business.
These entities can be used to under-report income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering, and financial crimes. The IRS said it's working with state authorities to identify these groups and penalize their owners.
Misuse of Trusts
The IRS said people promote taxpayers to transfer assets into trusts under the assumption that it will mean less income subject to tax, deductions for personal expenses and reduced estate or gift taxes. However, the IRS said these trusts rarely deliver the tax benefits promised.