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Every year the IRS publishes its "Dirty Dozen" list.
This is a list of the twelve most prominent
tax scams, ranked in order of their prevalence.
The IRS actively pursues and prosecutes those
guilty of perpetrating these schemes, but it
is important for taxpayers to be aware of them
also. In general, be especially wary of anyone
who says you don't need to pay any taxes, purports
to know of some obscure provision in the law
supporting his position, and is ready to share
his information for a fee.
Abusive Trusts. At the top of the list
this year is the abusive use of trusts. Trust
abuse has been prevalent for several years.
In spite of numerous criminal prosecutions
of those promoting the schemes, it continues
to be a persistent abuse. The promotion of
these scams is particularly insidious because
the proper use of trusts, especially in estate
planning, can effectively reduce the total
amount of taxes paid. Promoters of these schemes
find it easy to convince the unsophisticated
taxpayer of their validity. Trust scams take
many forms and promise such benefits as the
reduction of income subject to tax, the ability
to write off personal expenses, the diversion
of business income to foreign trusts, etc.
Those who promote these trusts often charge
high fees for their services. Taxpayers who
participate in these schemes will pay the up
front fees but then will end up paying the
taxes they supposedly avoided along with significant
penalties and interest. Before you enter into
any trust type arrangements contact the office
for advice.
Claim of Right Doctrine. This scheme is relatively
new but has already risen to number two on
the list. It involves taking a deduction equal
to the amount of wages on the return. It is
based on a misinterpretation of the tax code.
Corporation Sole. This form of organization
is used legitimately by some religious leaders
to separate themselves from the control and
ownership of church assets. Promoters of this
scam have mistakenly twisted the rules into
a means of avoiding federal taxes, child support
payments and personal debts.
Offshore Transactions. Last years number one
scam has dropped to number four this year.
It involves offshore bank accounts, brokerage
accounts, credit cards, wire transfers, trusts
and employee leasing, etc. to hide or underreport
income.
Employment Tax Evasion. Promoters of this ruse
twist tax law to claim that it is not necessary
to withhold employment taxes from employee's
wages. This misinterpretation has been refuted
in court and its promoters subjected to criminal
prosecution. Unsuspecting employers who fall
prey to this scam may be liable for all the
unpaid payroll taxes plus penalties and interest.
Individual employees will still be liable for
their share of the unpaid taxes.
Return Preparer Fraud. Unscrupulous return preparers
advertise heavily, guaranteeing large refunds.
They take a portion of the refund themselves
and in addition charge inflated fees. Be assured
the office does not engage in these practices.
Americans with Disabilities Act. Participants
in this fraudulent scheme purchase equipment
and services at an inflated cost from a promoter.
The promoter alleges that they satisfy the
requirements of the Disabled Access Credit.
A minimal down payment is made and a note signed
for the balance. The note is retired through
the performance of insignificant services.
Slavery Reparations. This scam was number one
on the list in 2002. Promoters claimed that
the law made provision for reparations payments
to the descendants of slaves. The promoters
would charge fees for preparing the returns
claiming the reparations. There is no such
provision in the law and the claims filed are
worthless.
Improper, Home Based Businesses. Set up a bogus,
home-based business and write off personal
expenses as business. This scam has been around
for a long time, and it keeps showing up. A
clear business purpose and a profit motive
are necessary for a legitimate business.
Frivolous Arguments. This is another scam that
won't go away. Promoters claim to know the "secret" of
not paying taxes, and they are willing to share
it with you for a fee. Unfortunately there
are no secret ways to avoid paying tax. Following
the advice of these promoters can lead to civil
and criminal penalties in addition to large
tax bills.
Identity Theft. We all know of the danger of
identity theft, but we don't usually think
of it as a fraudulent tax scheme. Unscrupulous
individuals send out documents which appear
to have come from the IRS in an attempt to
get your bank and brokerage account numbers.
Another scam takes the form of filing bogus
tax returns using a stolen Social Security
number. These returns typically generate large,
refunds for the person filing the return.
Share/Borrow EITC Dependents. Winding up the
list this year is an Earned Income Tax Credit
scam. Unscrupulous tax preparers share the
dependents of one family with those of another
family in order to illegally maximize Earned
Income Tax Credits on both returns.
If it sounds too good to be true it is! There are no secret
ways to avoid taxes. Communicate with the office
before adopting any suspicious tax strategies
or paying for unreliable advice. The ultimate
price will be high and the consequences severe.
The
purpose of this newsletter is to stimulate
thought for our clients and those professionals
we network with. One should consult with
a qualified tax planning professional prior
to implementing any tax planning strategies. If
you are an real estate planning, estate,
mortgage or insurance planning professional
receiving this newsletter, please call our
office and introduce yourself to us. We
are always seeking to grow our referral network
and expose more service professionals to
our client base. |
