IRS Warns of New E-Mail & Telephone Scams

Issue Number: IR-2008-011

Inside This Issue

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IRS Warns of New E-Mail and Telephone Scams Using the IRS Name; Advance Payment Scams Starting

WASHINGTON — The Internal Revenue Service today warned taxpayers to beware of several current e-mail and telephone scams that use the IRS name as a lure. The IRS expects such scams to continue through the end of tax return filing season and beyond.

The IRS cautioned taxpayers to be on the lookout for scams involving proposed advance payment checks. Although the government has not yet enacted an economic stimulus package in which the IRS would provide advance payments, known informally as rebates to many Americans, a scam which uses the proposed rebates as bait has already cropped up.

The goal of the scams is to trick people into revealing personal and financial information, such as Social Security, bank account or credit card numbers, which the scammers can use to commit identity theft.

Typically, identity thieves use a victim’s personal and financial data to empty the victim’s financial accounts, run up charges on the victim’s existing credit cards, apply for new loans, credit cards, services or benefits in the victim’s name, file fraudulent tax returns or even commit crimes. Most of these fraudulent activities can be committed electronically from a remote location, including overseas. Committing these activities in cyberspace allows scamsters to act quickly and cover their tracks before the victim becomes aware of the theft.

People whose identities have been stolen can spend months or years — and their hard-earned money — cleaning up the mess thieves have made of their reputations and credit records. In the meantime, victims may lose job opportunities, may be refused loans, education, housing or cars, or even get arrested for crimes they didn't commit.

The most recent scams brought to IRS attention are described below.

Rebate Phone Call

At least one scheme using the word “rebate” as part of the lure has been identified. In that scam, consumers receive a phone call from someone identifying himself as an IRS employee. The caller tells the targeted victim that he is eligible for a sizable rebate for filing his taxes early. The caller then states that he needs the target’s bank account information for the direct deposit of the rebate. If the target refuses, he is told that he cannot receive the rebate.

This phone call is a scam. No legislation has yet been enacted that would allow the IRS to provide advance payments to taxpayers or that determines the details of those payments. Moreover, the IRS does not force taxpayers to use direct deposit. Those who opt for direct deposit do so by completing the appropriate section of their tax return, with bank routing and account information, when they file; the IRS does not gather the information by telephone.

Refund e-Mail

The IRS has seen several variations of a refund-related bogus e-mail which falsely claims to come from the IRS, tells the recipient that he or she is eligible for a tax refund for a specific amount, and instructs the recipient to click on a link in the e-mail to access a refund claim form. The form asks the recipient to enter personal information that the scamsters can then use to access the e-mail recipient’s bank or credit card account.

In a new wrinkle, the current version of the refund scam includes two paragraphs that appear to be directed toward tax-exempt organizations that distribute funds to other organizations or individuals. The e-mail contains the name and supposed signature of the Director of the IRS’s Exempt Organizations business division.

This e-mail is a phony. The IRS does not send unsolicited e-mail about tax account matters to individual, business, tax-exempt or other taxpayers.

Filing a tax return is the only way to apply for a tax refund; there is no separate application form. Taxpayers who wish to find out if they are due a refund from their last annual tax return filing may use the “Where’s My Refund?” interactive application on the IRS Web site at IRS.gov. The only official IRS Web site is located at www.irs.gov.

Audit e-Mail

Another new scam brought to IRS attention contains features not seen before by the IRS. Using a technique calculated to get almost anyone’s attention, the e-mail notifies the recipient that his or her tax return will be audited. This is the first scam of which the IRS is aware that uses this to get the victim to respond.

Unusual for a scam e-mail, it may contain a salutation in the body addressed to the specific recipient by name. Most scam e-mails seen by the IRS are sent using the same technique used by spammers, in which hundreds of thousands of messages are sent to potential victims based on Internet address. Because of the volume, the typical scam e-mail is not personalized.

This e-mail instructs the recipient to click on links to complete forms with personal and account information, which the scammers will use to commit identity theft.

This e-mail is a phony. The IRS does not send unsolicited, tax-account related e-mails to taxpayers.

Changes to Tax Law e-Mail

This bogus e-mail is addressed to businesses, accountants and “Treasury” managers. It instructs them to download information on tax law changes by clicking on a series of links to publications on businesses, estate taxes, excise taxes, exempt organizations and IRAs and other retirement plans. The IRS believes that clicking on a link downloads malware onto the recipient’s computer. Malware is malicious code that can take over the victim’s computer hard drive, giving someone remote access to the computer, or it could look for passwords and other information and send them to the scamster. There are other types of malware, as well.

The urls contained in the link are not legitimate IRS Web addresses. All IRS.gov Web page addresses begin with http://www.irs.gov/.

Paper Check Phone Call

In a current telephone scam, a caller claims to be an IRS employee who is calling because the IRS sent a check to the individual being called. The caller states that because the check has not been cashed, the IRS wants to verify the individual’s bank account number. The caller may have a foreign accent.

In reality, the IRS leaves it entirely up to the individual to choose to cash or not cash a paper check. The IRS has no business need to know, and does not ask for, bank account or similar information, except when taxpayers indicate on their tax return that they are opting for the direct electronic deposit of their refund. In that case, however, it is the individual’s responsibility to provide the IRS with the correct bank routing and account numbers on the tax return; the IRS does not contact taxpayers to verify the information.

What to Do

Anyone wishing to access the IRS Web site should initiate contact by typing the IRS.gov address into their Internet address window, rather than clicking on a link in an e-mail or opening an attachment.

Those who have received a questionable e-mail claiming to come from the IRS may forward it to a mailbox the IRS has established to receive such e-mails, phishing@irs.gov, using instructions contained in an article on IRS.gov titled “How to Protect Yourself from Suspicious E-Mails or Phishing Schemes.” Following the instructions will help the IRS track the suspicious e-mail to its origins and shut down the scam. Find the article by visiting IRS.gov and entering the words “suspicious e-mails” into the search box in the upper right corner of the front page.

Those who have received a questionable telephone call that claims to come from the IRS may also use the phishing@irs.gov mailbox to notify the IRS of the scam.

The IRS has issued previous warnings on scams that use the IRS to lure victims into believing the scam is legitimate. More information on identity theft, phishing and telephone scams using the IRS name, logo or spoofed (copied) Web site is available on the IRS Web site at IRS.gov. Enter the terms “phishing,” “identity theft” or “e-mail scams” into the search box in the upper right corner of the front page.

Related Items:

• FS-2008-9, Identity Theft E-Mails Scams a Growing Problem
• IR-2007-109, IRS Warns Taxpayers of New E-mail Scams
• Suspicious e-Mails and Identity Theft

Timing of Snipes Trial Couldn't Be Better for IRS

http://www.cnn.com/2008/CRIME/01/29/snipes.trial.ap/index.html

OCALA, Florida (AP) -- Even Hollywood couldn't have written a more ideal script for the Internal Revenue Service than actor Wesley Snipes' tax-fraud trial.At a time when millions of Americans are buckling down to prepare their taxes, Snipes is being cast as a villainous example of the dangers of joining with Internet-fueled activists who claim the IRS has no authority to collect taxes.Snipes, the star of the "Blade" films and "White Men Can't Jump," is on trial with two tax protesters in one of the biggest criminal cases in IRS history, and the agency hopes the media attention on the matter will dissuade others in the "tax avoidance" movement from trying to outwit the government."

People who do it openly and notoriously, you've got to go after them," said Sheldon Cohen, who was IRS commissioner and general counsel in the 1960s. "Not because he's that important or the amount of money is that important, but because there are others who may be foolish enough to follow."

Snipes, 45, could get up to 16 years in prison if convicted on all counts, although sentences that long are unusual.His two co-defendants are an anti-tax ideologue who refuses to defend himself in court and an accountant who lost his licenses. The trio rested their defense Monday without calling any witnesses, saying they didn't need to."Nobody likes paying taxes, but paying taxes is the price we pay to live in a civilized society,"

Assistant U.S. Attorney M. Scotland Morris said Tuesday in closing arguments. "And it's the law, and that's what this case is about. It's about three men who felt they were above the law."Defense attorney Robert Barnes conceded Snipes' arguments may have been crazy, but insisted that didn't make them criminal."Disagreement with the IRS is not fraud of the IRS, is not deception," Barnes said. "It was an attempt to engage the IRS, to go through the IRS procedures and processes and see who's right."In lengthy filings to the IRS, the three defendants claimed they did not legally have to pay taxes, citing an obscure section of the tax code that establishes that foreign sources of income for U.S. citizens are taxable.

Protesters take that to mean only foreign sources are taxable, and wages made in this country are not."They string unconnected things together in a way that they're just not intended to be strung together," said Chris Rizek, a former Treasury Department lawyer who specialized in tax policy. "And the courts have repeatedly said 'No, that's the wrong interpretation, listen to this.' And they just don't listen."Snipes, who is free on $1 million bond, was paying millions in federal income taxes until 2000 when, according to prosecutors, he accepted the arguments of his two co-defendants.

Snipes then began seeking nearly $12 million in illegal refunds for taxes he already paid.Snipes, alleged ringleader Eddie Ray Kahn and former CPA Douglas P. Rosile were indicted on eight counts alleging tax fraud, conspiracy and willful failure to file returns. Kahn now refuses to leave his jail cell because he believes the court has no jurisdiction to prosecute him.The government says Kahn founded a group in the 1990s, American Rights Litigators, and a successor group, Guiding Light of God Ministries, that purported to help members legally avoid paying taxes. Rosile, a former accountant who lost his licenses in Ohio and Florida, prepared the paperwork.

Snipes joined their group in 2000.Witnesses for the prosecution have said up to 4,000 people refused to pay taxes based on the group's arguments.

The three men claimed the IRS is not a legitimate government agency. Snipes also argued in long, bizarre letters that he was a nonresident alien; that the IRS terrorizes and deceives citizens; and that efforts to prosecute him would cause "increased collateral risk."Most tax cases are handled in civil court, because the IRS does not have enough agents or time to pursue criminal charges against ordinary taxpayers who fudge a deduction or a decimal place on their tax returns.But pursuing the matter in criminal court carries other risks -- the burden of proof is higher, and an acquittal would instantly galvanize the tax-avoidance movement, which already enjoys boundless exposure on the Internet.The IRS has been successful in pursuing criminal cases against the movement's followers.

Last year, for example, a New Hampshire tax protester vowed to die fighting rather than be apprehended following criminal conviction on several tax charges. Several people were arrested trying to help Ed Brown and his wife avoid capture, and almost all of them were from other states.Brown and his wife were taken peacefully, but only after agents tricked the couple into surrender.

But there are exceptions. In 2003, FedEx pilot and tax protester Vernice Kuglin was acquitted because the jury found she sincerely believed she didn't have to pay taxes.Kuglin's assets were seized, and the government got its tax money.

Despite that, her case is held by some protesters as proof that the IRS is a sham, and citizens really don't have to pay taxes.Cohen, the former IRS commissioner, said trials like Snipes' are important to discourage potential tax scofflaws from defying the government."Locks are important on windows to keep honest men from becoming thieves," Cohen said. "Because a thief can get into a window even if it's locked, right? But you do that as a deterrent."

Tax Debt Help - Deductions & Credits

The goal of every taxpayer whether small business or corporations is to lower your tax liability. In a word, “deductions lower your taxable income, and credits lower your taxes”. Below is a list of links that will provide you with a brief description of those deductions and credits and ultimately…..”lower your tax liability”.

Tax Deduction for Charity Donations

Home Mortgage Interest Tax DeductionEnergy Tax CreditsOther Tax Credits - Form 1040

Adoption Tax Credit: How to Claim the Adoption Credit Child Tax Credit: How to Claim the Child Tax Credit on Form 1040

Retirement Savings Contribution Credit

Education Credits - Hope and Lifetime Learning Tax Credits

Credit for the Elderly or Disabled - Form 1040 Line 48 Child Care Tax Credit & Dependent Care Expenses - Form 1040 Line 48

Adjustments to Income - Preparing Your 1040 Step 5

Adoption Credit - Form 1040 Line 52

Alimony Paid Tax Deduction Casualty & Theft Losses

Child Care Tax Credit & Dependent Care Expenses - Form 1040 Line 47

Child Tax Credit - Form 1040 Line 51

Classroom Expenses Deduction Credit for the Elderly or Disabled - Form 1040 Line 48

Domestic Production Activities Deduction - Section 199

Early Withdrawal Penalty Deduction

Earned Income Credit: Qualfying for the Earned Income Tax Credit Education Credits, Hope Credit, Lifetime Learning Credit, Form 1040 Line 49

Educator Expenses: Claiming a Tax Deduction for Educator Expenses

Foreign Tax Credit - Form 1040 Line 46

Qualified Performing Artists (QPA) Deduction Moving Expenses

Self-Employment Tax Deduction

Self-Employment Health Insurance Deduction

SEP-IRA Deduction Early Withdrawal Penalty Deduction Alimony Paid Deduction

Health Savings Account Deduction

Health Savings Account Deduction: Tax Deduction for Health Savings Accounts How To Pay Zero Taxes 2005 (Book Review)

Hybrid Car Tax Credit – Essential Information about the Alternative Motor Vehicle Credit

Hybrid Car Tax Deduction - Clean Burning Fuel Deduction

IRA Deduction (Traditional Individual Retirement Account) Itemized Deductions

Job Search Tax Deduction Tips

Limitations on Itemized Deductions

Moving Expenses Tax Deduction Other Tax Credits - Form 1040 Line 53
Personal Exemptions

Qualified Performing Artists Expenses

Retirement Savings Credit, Form 1040 Line 50 & Form 8880

Self Employment Tax Deduction Self-Employment Health Insurance Deduction

SEP, SIMPLE, Retirement Plan Deduction

Standard Deduction

Student Loan Interest Deduction Student Loan Interest Tax Deduction

Tax Credits

Traditional IRA Tax Deduction - Individual Retirement Account Deduction

Tuition and Fees Deduction for College Expenses

Tuition and Fees Tax Deduction

S. Raines, Sr. Financial Advisor/Tax Preparer

Retirement Fund Early Withdrawals and the Tax Penalty

As a veteran tax preparer, I have found that there are lots of reasons why folks don't file returns. But one of the biggest reasons is the early withdrawal of retirement funds. Most of the time they don't elect to have federal tax withheld. Then when it comes time to file and that 1099-R arrives in the mail, fear overwhelms them. Now they're facing not only the federal withholding, but also the 10% penalty for early withdrawal.

Below is some detailed information which I found at William Perez's website at About.com which gives the best overview of early withdrawals that I have found on the web. Take a few minutes to see just how overwhelming these withdrawals can be to your tax liability.

If you withdraw money from a traditional individual retirement account (IRA), 401(k), 403(b), or other qualified retirement plan before you turn age 59 1/2, you may be subject to an early distribution penalty of 10%. There are exceptions. This penalty does not apply to Roth IRAs as long as it has been at least five years since you first opened up your Roth account. Here's what you need to know about the early distribution tax.

The additional tax on an early distribution is 10% of the taxable amount. The taxable amount is also included in your taxable income. This 10% tax is in addition to regular income taxes. I call this the early withdrawal tax penalty, because it is similar to the penalty banks charge when you liquidate a savings account early. You can avoid this additional tax penalty if you meet certain criteria, but you cannot avoid including your retirement withdrawal from your taxable income.

So you will want to consider the tax impact before you tap your retirement accounts for short-term financial emergencies.

If you withdrew money from a SIMPLE IRA and you first began participating in a SIMPLE IRA plan within the past two years, then your early distribution penalty is 25% instead of 10%. You figure the additional tax either directly on Form 1040 line 59, or on Form 5329 (PDF) and Instructions for Form 5329 (PDF). You calculate the additional tax penalty directly on Form 5329 if you meet one of the exceptions and the retirement plan did not report the exception on Form 1099-R box 7.

To calculate the additional tax penalty directly on Form 1040 line 59, you:

1. Look on Form 1099-R from your retirement plan.
2. Find the figure in boxes 1 (Gross Distribution) and 2a (Taxable Amount), and the code in box 7 (Distribution Codes).
3. Multiply the amount in box 2a by 0.10.
4. Report this amount on Form 1040 Line 60.
5. Write "No" on the dotted lines next to line 59 to inform the IRS that you do not need to attach Form 5329.

Exceptions to the Early Distribution Tax Penalties

You do not have to pay the additional 10% tax penalty on your early retirement distribution if you certain exceptions. Exceptions for Early Distributions from an IRA:

1. You had a "direct rollover" to your new retirement account,
2. You received a lump-sum payment but rolled over the money to a qualified
   retirement account within 60 days,
3. You were permanently or totally disabled,
4. You were unemployed and paid for health insurance premiums,
5. You paid for college expenses for yourself or a dependent,
6. You bought a house*,
7. You paid for medical expenses exceeding 7.5% of your adjusted gross income**, or
8. The IRS levied your retirement account to pay off tax debts.

Exceptions for Early Distributions from a Qualified Retirement Plan such as a 401(k) or 403(b) plan:

1. Distributions upon the death or disability of the plan participant.
2. You were age 55 or over and you retired or left your job.
3. You received the distribution as part of "substantially equal payments" over your
   lifetime.
4. You paid for medical expenses exceeding 7.5% of your adjusted gross income.**
5. The distributions were required by a divorce decree or separation agreement
   ("qualified domestic relations court order"),

* The home-buying exception has the following additional criteria: you did not own a home in the previous two-years, and only $10,0000 of the retirement distribution qualifies to avoid the tax penalty. ** You do not need to itemize in order to claim the medical expense exception. If the exception is properly coded in box 7 of your 1099-R form, you do not need to fill out Form 5329. If an exception applies and is not recorded in box 7, then you need to fill out Form 5329.

1099-R Box 7 Distribution Codes

The following is a list of distribution codes that may appear in box 7 for Form 1099-R to report distributions from a retirement account. This list is taken from (PDF), pages 9 and 10. Distribution Codes for 1099-R Box 7

Distribution Code	Description
1	Early distribution, no known exception
2	Early distribution, exception applies
3	Disability
4	Death
5	Prohibited transaction
6	Section 1035 exchange
7	Normal distribution
8	Excess contribution
9	Cost of life insurance protection
A	May be eligible for 10-year tax option
D	Excess contribution
E	Excess annual additions
F	Charitable gift annuity
G	Direct rollover
J	Early distribution from Roth IRA
L	Loans treated as deemed distributions
N	Recharacterized IRA contribution
P	Excess contribution
Q	Qualified distribution from a Roth IRA
R	Recharacterized IRA contribution
S	Early distribution from a SIMPLE IRA in the first two years, no known exception
T	Roth IRA distribution, exception applies

Figuring the Additional Tax Penalty on Form 5329

You calculate the additional tax on early withdrawals from a retirement account using Form 5329 (PDF) lines 1 through 4.

Line 1: Report the taxable distribution from box 2a of Form 1099-R.

Line 2: Enter the amount not subject to the additional tax because an exception applies. Enter the appropriate exception code.

Line 3: Subtract line 2 from line 1. This is the amount of retirement distributions that are subject to the additional tax.

Line 4: Multiply the figure on line 3 by 0.10. Also enter this amount on Form 1040 line 60. If the distribution was from a SIMPLE IRA, the penalty may be 25% instead of 10%. The 25% penalty applies if you began participating in a SIMPLE IRA account within the past two years. Multiply the amount on Line 3 by 0.25 instead.

Exception Codes for Form 5329 Line 2

The following exception codes are to be used for Form 5329 Line 2 to inform the IRS that part or all of your retirement withdrawal is not subject to the early withdrawal tax penalty. The following exception codes are found in Instructions for Form 5329 (PDF), pages 2 and 3.

01: Separation from service after reaching age 55.

02: Distributions are paid as part of a series of substantially equal periodic payments.

03: Distributions due to permanent and total disability.

04: Distributions due to death.

05: Distributions to pay for medical expenses exceeding 7.5% of adjusted gross income.

06: Distributions to another person under a qualified domestic relations court order.

07: Distributions to pay for health insurance premiums and you were unemployed.

08: Distributions to pay for college expenses.

09: Distributions to pay for a first-time home purchase, up to $10,000.

10: Distributions due to an IRS levy.

11: Other. Use this code if more than one exception applies and see IRS Instructions page 3.

S. Raines, Sr. Financial Advisor/Tax Preparer

Tax Debt Help - Traditional IRA vs. Roth IRA

What is an IRA?An IRA or Individual Retirement Account is a plan that allows you to contribute a portion of your after tax earned income each year. If you are 50 or older, you can contribute even more to your IRA. Almost anyone can contribute to an IRA if they have earned income for the year at least equal to the amount of the contribution. There is a maximum contribution limit per year and those who are 50 years of age or older can make additional "catch up" contributions.

Annual Contribution Limits for IRAs per Individual

Tax years 2006 - 2007	$4000 for those under 50 and $5000 for those 50 and over
Tax year 2008	$5000 for those under 50 and $6000 for those 50 and over

Married couples can each contribute to an IRA even if only one had an income for the year if the working spouse earns enough to cover the IRA contributions for both. There are two common types of IRAs, the traditional IRA and the Roth IRA. All accumulated interest, dividends, and capital gains on a traditional IRA are tax-deferred until the money is withdrawn. All accumulated interest, dividends, and capital gains on a Roth IRA are tax-free if you meet certain requirements.

Difference Between a Traditional and Roth IRA
A Traditional IRA is a tax-deferred individual savings plan. Contributions are made up to a specified limit with the contribution tax deductible. Money invested and earned in a traditional IRA are subject to income taxes at the time of withdrawal.

Withdrawals can be made without penalty once a person reaches the age of 59 1/2 and a person must begin withdrawing from the account at the age of 70 1/2.A Roth IRA is also primarily an individual savings plan.

Contributions can be made up to a specified limit on a non-deductible basis. This means, a contribution can be made to a Roth IRA but no deduction can be taken from income tax for the amount of the contribution.

Withdrawals are tax free within certain limitations. Withdrawals can be made without penalty once a person reaches the age of 59 1/2 provided the funds have been in the account for 5 years. Unlike a traditional IRA, contribution can continue to be made to a Roth IRA even after the person has reached the age of 70 1/2.

S. Raines, Sr. Financial Advisor/Tax Preparer