Tax Scams

by Sandy Botkin, Esq., CPA


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 of folks can be fooled. Every year IRS publishes a list of the "dirty dozen" tax scams. Following are some of the latest:

  1. Phishing scams: Folks are receiving letters or emails with the IRS / Treasury department logo informing them that they may be owed a refund. In order to obtain this refund, they have to prove that they are the right person by confirming certain personal information such as social security number, motherís maiden name, address etc. To date, IRS has identified as many as 1500 different phishing scams.
  2. Sandyís Elaboration: IRS will NEVER 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 phishing@irs.gov.

  3. 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.

    Sandyís Elaboration: IRS will NEVER ask for this type of information regarding your social security number or bank account information.

  4. 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 "marinerís tax deduction"
    • "Tax filing is voluntary and thus, you donít have to pay anything"
    • "Taxes are only required for federal employees"
    • "Wages, tips and other service income is not taxable",

    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.

    Sandyís 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 governmentís legal fees against those that make these arguments in court.

  5. 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.



    Sandyís Elaboration: US citizens are taxed on their world-wide income. Setting up foreign bank accounts will NOT shield them from taxation. Furthermore, on the federal tax return there is a question specifically asking about foreign accounts. Now a taxpayer may have foreign accounts for many reasons; however, if a taxpayer doesnít 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.
  6. 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. In 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.



    Sandyís 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.
  7. 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. Donít get fooled into thinking that this scam will work.


  8. 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 havenít even previously filed a federal tax return.
  9. Return preparer tax fraud: Perhaps this has been an ongoing problem for years which is why 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 pumped up their credentials claiming that they were CPAs or lawyers, which wasnít the case. Some improperly gave the fuel tax credit noted above. Many preparers inflated taxpayerís deductions in order to generate a lower tax liability. As an example, there was one accountant who claimed thousands more in charitable deductions than his client donated.

    Sandyís Elaboration: IRS investigates these fraudulent accountants and subsequently audits all of their clients. You should certainly look for an aggressive accountant but also one who is honest!

  10. 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.

    Sandyís 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, such as Nevada, that promise increased privacy. Even corporations in these states can easily be investigated by the IRS. Donít be fooled into thinking that any entity can be used to hide income from the IRS.

  11. 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!
  12. 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.

    They also claim that if you own property over a year, you can donate property and get a deduction for the fair market value of the item. Promoters have set up scams where they sell paintings, antiques etc. to taxpayers promising that after a year they will get these taxpayers an appraised value of many times the initial cost. When the item is donated a year later, the taxpayer uses the inflated appraised value to receive a higher charitable deduction. These overvaluation scams are fairly rampant.
  13. Slavery tax credit: Although this isnít on this yearís dirty dozen tax scams per se, IRS has noticed that this is a fairly widespread "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.
  14. 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!

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