Tax Scams to Watch Out For

Our personal finance contributor talks about the top scams on the Internal Revenue Service's radar this tax season.

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ALEX CHADWICK, host:

Back now with DAY TO DAY.

It's tax time and for some that means scam time. The IRS has released its annual list of the most popular tax scams and topping this year's dirty dozen is a new one tied to the new telephone excise tax refund.

Here to explain all, Michelle Singletary, our personal finance contributor. Michelle, welcome back and what is this new tax credit this year that has to do with telephone bills. How does this work?

MICHELLE SINGLETARY: Well, as many of you should know, the one-time excise telephone tax refund is available only on your 2006 Federal Income Tax Return. And it's basically intended to refund the tax collected on your long distance telephone service for say your fax, your landline, computer or cell phone. It's for a 41-month period from the end of February 2003 to the beginning of August 2006.

And typically, the standard deduction is anywhere from $30 to $60.

CHADWICK: So it's $30 to $60, is that per year or is that all told?

SINGLETARY: That's all told for just 2006, so you would get anywhere from $30 to $60, depending on the number of exemptions that you take. Now, the scam comes in because you can also determine the exact amount of excise tax you paid. The IRS figured that most people, the refund would be anywhere from $30 to $60. But some people have been putting in returns for much more than they would've paid in the tax.

And the IRS says in some cases as much as $30,000.

CHADWICK: Well, that's a lot of money, but this isn't money that someone is going to take from you. These are just kind of general tax cheats?

SINGLETARY: Right. This is tax cheats, but what happens is they've got these tax promoters or tax preparers that says, come on, you know, why don't you put in for this amount and perhaps I'll get a percentage of that. And they know that it's more than they would've been entitled to. I mean in order to get a $30,000 refund under this particular refund, you would have had to have a long distance telephone bill of a million dollars.

CHADWICK: Wow. All right. So what else is on the IRS's list this year? What do you find?

SINGLETARY: Well, there is one called zero wages, in which people dispute the income on their W2 forms - and they'll file some paperwork saying, well, you know, my employer reported the wrong amount. And again, a lot of these scams come through a preparer or a promoter. And oftentimes, they get people to do this and promise they'll get a bigger refund, and then the preparer or the promoter gets a percentage of whatever that refund is.

And one other tax scam, they're targeting native Americans, and they're telling them that they can get a tax credit because they're native Americans - and it's just not true.

CHADWICK: Well, is there some criminal liability there for this tax preparer?

SINGLETARY: Oh, definitely. The IRS, when they find it, will go after the preparer. But here is the other thing. They come after you as well because when you signed that tax return - whether you knew the refund was legitimate or not - you become liable.

CHADWICK: Michelle Singletary writes the nationally syndicated column, "The Color of Money," and she's DAY TO DAY's regular personal finance contributor. Michelle, thank you again.

SINGLETARY: You're so welcome.

CHADWICK: And if you need a little bit more financial advice from Michelle, you're in luck because she has a new NPR podcast. It's free. You can sign up by going online to npr.org/colorofmoney. All one word.

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