Tax Fraud Tuesdays: The Dirty Dozen #7

Each year, the Internal Revenue Service compiles a list of the 12 most common, dangerous or costly tax scams. They call this list their “dirty dozen” and recommend that taxpayers stay vigilant during tax season. We will summarize these twelve scams for you, and highlight the steps you should take to protect yourself.

Another way that shady tax preparers can advertise such abnormal returns is with excessive claims for business credits. Two tax credits in particular are frequently used: the research credit and the fuel tax credit. The first is a credit that incentivizes research and development by companies in the United States. However, without the proper documentation or proof of research, use of this credit is illegal. To qualify for the credit, the IRS specifies that the research must “involve a process of experimentation using science with a goal of improving a product or process the taxpayer uses in its business or holds for sale or lease.” Business cannot claim research conducted after production, and there are limits on what wages and expenses business can claim. A legitimate tax preparer will be aware of all the regulations and will require documentation of the research over the entire period in which it was conducted.

The fuel tax is intended to apply to vehicles and equipment on roads or highways. Therefore the credit can apply to vehicles (including boats, trains, and planes) or farming equipment used off-highway. If you buy fuel for one of the nontaxable purposes laid out by the Federal government, you can claim this credit. However, this is not true for the majority of taxpayers, and the IRS works with the Department of Justice to verify fuel tax exemption claims. Remember, the taxpayer is always responsible for the submitted tax return, so always read over the final return and be careful when selecting a tax preparer.