The latest wrinkle in tax fraud: financially strapped seniors trying to fabricate information about their Social Security benefits to avoid paying taxes.
Although the scope of the fraud is unknown, the issue has been added to the annual Internal Revenue Service (IRS) “dirty dozen” tax scam warnings issued last week. Other scams range from preparer fraud, hiding offshore income and improperly using private annuity trusts.
Under the latest scam of choice, seniors exaggerate the amount of money withheld from their Social Security benefits and report no income. Some experts say this deception is either an act of desperation or stupidity, because it’s a relatively simple matter for the IRS and the Social Security Administration to compare information and spot fraudulent reporting without requiring an audit.
“It should be relatively easy for the IRS to catch,” said Steve Ellis, Vice-President of Tax Payers for Common Sense (TCS). “So people employing this tactic are playing with fire and daring the IRS to slap them with a $5,000 penalty.”
“If I were to cheat on my taxes that [tactic] would be my last one,” said Tom Ochsenschlager, Vice President of Taxation, American Institute of Certified Public Accountants (AICPA), who was surprised this item made the tax scam list this year.
“I guess people are just desperate,” said Ochsenschlager, who estimates this scam would not yield a high return for the taxpayer. “If they are making false Social Security reports they just have a criminal state of mind.”
A Cheating Culture
Thirteen percent of Americans say it’s okay to cheat on their taxes, according to a taxpayer attitude survey released last month by the IRS Oversight Board – a year-over-year increase of four percent. “When the economy is bad you will find more people trying to manipulate the system or taking advantage,” Ellis said.
Social Security benefits are considered income by the IRS, and taxpayers are required to pay federal income taxes on those benefits if their annual combined income is $25,000 or higher. The Social Security Administration estimates that less than one-third of current beneficiaries have taxable benefits. People with income between $25,000 and $34,000 pay tax on up to 50 percent of their benefits. Higher income earners pay tax on up to 85 percent of their benefits, which is the cap. The retirement program issues monthly checks to 52 million Americans, most of whom are retirees and families.
The I.R.S. estimates the nation’s annual “tax gap,” or the difference between what the government is owed and what it receives, is $290 billion, even after late payments are collected. Efforts to close this gap have been ongoing but enforcement could be more successful due to a proposed increase in funding, some $12.6 billion for fiscal 2011.
The annual “dirty dozen” list doesn’t change dramatically each year but tends to reflect what the IRS is aggressively targeting. Many of the items are “oldies but goodies,” says Ellis, like preparer fraud. In an effort to combat dishonest or incompetent preparers, the IRS proposed new registration, testing, and continuing education for tax preparers.
“Many of the preparers show up on strip malls for three months a year,” said Robertson Williams, a senior fellow at the Tax Policy Center. “It’s a seasonal business. They don’t really know what they are doing. There is a question if they are capable of it.” And Americans often fall for the large refunds they promise, Williams said.
Earlier this month a federal court in Los Angeles closed a tax firm for requesting $23 million in fraudulent income tax refunds. Court documents said the firm had told clients that they could secure refunds that would help pay off mortgage and/or credit card debts. Electronic tax return filing and the option for direct deposits of tax refunds have also increased the opportunities for cheating. “When you combine them you have a perfect storm,” Ochsenschlager said.
Read the complete list of 2010 tax scams here.
