Avoid Tax Scams to Make Your Life Less Taxing
by Sandy Botkin, Esq., CPA
You just attended a seminar in a nice room with plenty of expensive audio-visual equipment. Many of the seats are filled with folks who are well-dressed and quite courteous. Out comes a speaker who is well-dressed, polished and seems to be very competent, who oozes with "success." He informs the group that they can eliminate paying taxes based on a number of legal arguments. He cites numerous cases that have supposedly supported his arguments. Before you blow your hard-earned cash on his training materials and documents, take a deep breath and read this article.
Introduction: This article will cover the following:
- Phishing scams
- Economic Stimulus scams
- Frivolous tax arguments
- Fuel Credit Scams
- Hiding income offshore
- Abusive retirement scams
- Claiming zero wages
- Filing false claims for refunds
- Return preparer tax fraud
- Disguised corporate ownership
- Misuse of trusts
- Abuse of charitable contributions and organizations
- Slavery tax credits
There are a number of tax scams, not to mention other types of fraud that are being perpetrated upon the American public. It has become such as widespread phenomenon that many of the enforcement agencies are overwhelmed by these frequent occurrences. My purpose is to protect you from being another victim of the newest types of thefts.
There are an ever increasing number of scams being investigated by the IRS. Some of these scams are so devious and clever that even the smartest folks can be fooled. Every year IRS publishes a list of the "dirty dozen" tax scams. Here are some of the latest scams being investigated by the IRS.
- Phishing scams: Folks are receiving letters or emails with the IRS / Treasury department logo informing them that they may be owed a refund or to inform them that they may owe a lot of taxes unless they clear up a possible error in identity. In order to obtain this refund, or to clear up the error, they have to prove that they are the right person by confirming certain personal information such as social security number, mother's maiden name, address etc. Other examples include phony census takers asking for personal information. Recently, one new phishing scam involved notices by someone posing as a clerk of the circuit court notifying people that there is an arrest warrant out for them, but it might be due to a supposed imposter. Thus, they ask for social security numbers and other identifying information in order to clear up the discrepancy. To date, IRS has identified as many as 1500 different phishing scams.
Elaboration: IRS nor any governmental organization will ever call you or write you asking for this type of personal information. You should never provide it to anyone by phone, letter or email. If you get an email requesting this type of information allegedly from the IRS, forward the email to email@example.com
- Economic Stimulus Scams: Some scam artists are trying to trick individuals into revealing personal financial information that can be used to access their financial accounts by making promises relating to the economic stimulus payment, often called a "rebate." To obtain the payment, eligible individuals in most cases will not have to do anything more than file a federal tax return. But some criminals posing as IRS representatives are trying to trick taxpayers into revealing their personal financial information by falsely telling them they must provide information to get a payment. Sometimes, these criminals might ask for bank account information for the IRS to directly deposit the rebates, which then results in the thieves cleaning out the bank account.
Elaboration: IRS will NEVER ask for this type of information regarding your social security number of bank account information.
- Frivolous arguments: There are a host of frivolous arguments being made by promoters of scams that purport to reduce or even eliminate most tax liability. Some of the many fallacious arguments are:
- Taxes are unconstitutional or not properly codified by Congress.
- Folks are promised a non-existent mariner's tax deduction.
- Tax filing is "voluntary" and thus, you don't have to pay anything.
- Taxes are only required for federal employees.
- There is no statute that properly codifies the tax code.
- Wages, tips and other service income is not taxable, and many more.
- You can get a complete list of these fraudulent arguments by going to: http://www.irs.gov/taxpros/article/0,,id=159932,00.html
- This is found in IRS notice 2007-61
Elaboration: None of these frivolous arguments have won in court. In fact, the judges are so tired of hearing them that they are asserting the government's legal fees against those that make these arguments in court.
- Fuel Credit Scam: Sometimes there is some truth behind the scam. Farmers are allowed a fuel tax credit for off-highway business purposes. However, some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit was recently added to the list of frivolous tax claims, potentially subjecting those who improperly claim the credit to a $5,000 penalty.
- Hiding income offshore: To my knowledge this scam has been around for years but is being aggressively investigated by the IRS. Promoters are promising that by placing assets offshore in foreign banks or tax havens, taxpayers would avoid all taxes and, at the least, not have their income discoverable by the IRS on these accounts. Interestingly, some Swiss banks helped promote this scam to the detriment of those involved. As an offshoot of this, some promoters set up foreign credit cards and promised that all income earned is paid to the credit card. This way, they promote that there will be no tax and that the IRS will never find out.
Elaboration: US citizens are taxed on their world-wide income. Setting up foreign bank accounts will NOT shield them from taxation. Even worse, on the federal tax return, there is a question asking about these. Now a taxpayer may have foreign accounts for many reasons; however, if a taxpayer doesn't disclose these accounts, they are subject to criminal fraud penalties. Moreover, IRS is aggressively investigating these accounts and has cut deals with most foreign jurisdictions.
- Abusive retirement scams: The IRS continues to uncover abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to Roth IRAs. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into Roth IRAs or companies owned by their Roth IRAs at less than fair market value. I n one variation of the scheme, a promoter has the taxpayer move a highly appreciated asset into a Roth IRA at cost value, which is below annual contribution limits even though the fair market value far exceeds the amount allowed.
Elaboration: Contributions to retirement plans must be made in cash and NOT with appreciated assets. Also there are limitations to yearly contributions, which must not be exceeded.
- Claiming zero wages: Some taxpayers try to file phony wage or income related information such as Form 4852 which is a substituted W-2 or amended form 1099 ( for income, dividends and royalties) in order to improperly reduce their taxes to zero. This type of behavior is being tracked by the IRS and is aggressively being prosecuted. Don't get fooled into thinking that this scam will work.
- Filing a false claim for refund: Usually taxpayers file form 843 to abate previously assessed taxes giving some fictitious argument. Even worse, many individuals who have tried this haven't even previously filed a federal tax return.
- Return preparer tax fraud: Perhaps this has been an ongoing problem for years. However, I have seen a dramatic increase in enforcement by the IRS against fraudulent tax preparers. Thirty years ago, it was rare if more than two or three tax preparers per week were barred from preparing taxes or representing taxpayers. Today, I have seen as many as thirty tax preparers per week barred from preparing taxes.
The range of what these accountants are doing is quite varied. Some fraudulently puff up their credentials claiming that they are CPAs or lawyers, which wasn't the case. Some improperly give the fuel tax credit noted above. Many inflate deductions for taxpayers that the taxpayers never paid for. As an example, there was one accountant who claimed for his clients thousands more in charitable deductions than the client paid for.
Elaboration: IRS investigates these fraudulent accountants and audits all of their clients. You should certainly look for an aggressive accountant but also one who is honest!
- Disguised corporate ownership: Some folks are forming entities in some states in order to hide the owners who are conducting a wide array of illegal activities such as hiding income, money laundering, etc. IRS is working with state authorities to investigate these activities.
Elaboration: No entity can guarantee complete shielding from the IRS. If IRS wants to investigate an entity, they can get the names of the owners, officers and any other pertinent information. There are some states that do promise increased privacy such as Nevada. However, even a Nevada corporation can easily be investigated by the IRS. Don't be fooled into thinking that any entity can be used to hide income from the IRS.
- Misuse of trusts: Many promoters have promised taxpayers that certain trusts can be set up to minimize taxes by deducting a wide array of personal expenses or avoiding estate taxes. While there is a kernel of truth to this, especially regarding estate taxes, these trusts must be set up correctly. Moreover, they usually do not allow for deduction of personal expenses. It is vital to seek a good, qualified tax attorney to verify that these trusts do accomplish what was promised and are set up correctly. Finally, putting property in trust where you can control the assets or receive distributions can result in you, the grantor, being taxed on all of the trust income!
- Abuse of charitable contributions and organizations: Many promoters promise to maintain control over donated property while taking a deduction. Examples of phony charitable deductions involve taxpayers who claim tuition payments as charitable contributions. Also, if you own property over a year, you can donate property and get a deduction for the fair market value of the item. However, promoters have set up scams where they sell paintings, antiques, closely held stock etc. to taxpayers on the promise that they will get these taxpayers an appraised value of many times the cost in a year for charitable deduction purposes. This overvaluation scams are fairly rampant.
- Slavery tax credit: Although this isn't on this year's dirty dozen tax scams per se, IRS has noticed that this is fairly widespread as a "frivolous argument." Promoters promise African Americans a special tax credit as reparation for slavery and oppressive treatment. This is absolutely false and no one should be fooled by this.
Each year, IRS publishes a new list of their "dirty dozen" tax scams. You should be aware of these widespread scams. They can cost you large penalties and may even subject you to criminal penalties if you follow their advice. Avoiding these scams and running from people who promote them will make your life less taxing!