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Legitimate Tax Benefits Are Great, But If It Sounds Too Good ... ... IRS Cautions Taxpayers About Twelve Common Tax Scams
By Paul Santos
The past few years we have kept our loyal readers advised of the so-called "Dirty Dozen" tax scams and abuses published annually by the IRS. We wanted to update you regarding the current year 2008 filing season scams. As in the past the IRS warns people not to fall for these schemes peddled by dishonest tax practitioners and other scammers.
In Information Release 2008-41 (3/13/08) the IRS renewed its warnings to taxpayers about avoiding unsupportable tax schemes and scams. In that notice, the IRS unveiled what it believes are at the top of the current watch list. In order, as listed on the Information Release (and nearly verbatim from the public record itself which can be found at http://www.irs.gov/newsroom/article/0,,id=180075,00.html, the 2008 Dirty Dozen are as follows:
(1) Phishing: This is a technique used by identity thieves to acquire personal financial data in order to gain access to the financial accounts of unsuspecting consumers, run up charges on their credit cards or apply for loans in their names. Often these internet-based criminals pose as representatives of a financial institution and send out fictitious e-mail correspondence in an attempt to trick consumers into disclosing private information. Sometimes scammers pose as the IRS itself, enticing taxpayers to click on a site in an email that directs them to enter personal information so that a refund can be issued to them. Keep in mind that the IRS never uses e-mail to contact taxpayers about their tax situation.
(2) Scams related to the Economic Stimulus Payment: There are scam artists 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." The IRS wants you to keep in mind that to obtain the payment, eligible individuals in most cases will not have to do anything more than file a 2007 federal tax return. These criminals posing as IRS representatives are trying to trick taxpayers into revealing their personal financial information by falsely telling them they must provide the information to get a payment. These criminals will contact their potential victim by phone or e-mail telling their potential victims that he or she is eligible for the payment but must provide a bank account number (or similar information) to get the payment. If the taxpayer is unwilling, the victim is told that he or she cannot receive the rebate unless the information is provided. The IRS is reminding taxpayers that the only way to get a stimulus payment is to file a 2007 tax return. As always the IRS urges taxpayers to be extra-vigilant, and keep in mind the IRS will not contact taxpayers by phone or e-mail about their stimulus payment.
(3) Frivolous Arguments: Promoters of frivolous schemes encourage people to make unreasonable and unfounded claims to avoid paying the taxes they owe. Recently, the IRS expanded its list of frivolous legal positions that taxpayers should stay away from. Most recently, promoters claim a misrepresentation of the 9th Amendment to the U.S. Constitution regarding objections to military spending, erroneous claims that taxes are owed only by persons with a fiduciary relationship to the United States, a nonexistent "Mariner's Tax Deduction" related to invalid deductions for meals and the misuse of the fuel tax credit (see below). These arguments are false and have been thrown out of court. Don't believe these claims and remember that the taxpayer is ultimately responsible for paying all incurred tax liabilities.
(4) Fuel Tax Credit Scams: The IRS is receiving frivolous claims for the fuel tax credit. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. There are individuals 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. This means anyone who improperly claims the credit is subject to a $5,000 penalty.
(5) Hiding Income Offshore: The IRS reminds us that individuals continue to try to avoid paying U.S. taxes by illegally hiding income in offshore bank and brokerage accounts or using offshore debit cards, credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance plans. The IRS continues to aggressively pursue taxpayers and promoters involved in such abusive transactions.
(6) Abusive Retirement Plans: Abuses continue to be uncovered in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). IR 2008-41 specifically identifies one example of a promoter who has the taxpayer move a highly appreciated asset into a Roth IRA at a cost value, which is below annual contribution limits even though the fair market value far exceeds the amount allowed.
(7) Zero Wages: This "idea," which first appeared in the Dirty Dozen in 2006, urges a taxpayer to attach to his or her return either a Form 4852 (Substitute Form W-2) or a "corrected" Form 1099 showing zero or little wages or other income submitted with a federal tax return. In some cases the taxpayer may include a statement indicating the taxpayer is rebutting information submitted to the IRS by the payer. An explanation on the Form 4852 may cite "statutory language behind IRC 3401 and 3121" or may include some reference to the paying company refusing to issue a corrected Form W-2 to the taxpayer "for fear of IRS retaliation." The IRS urges taxpayers to resist any temptation to participate in any of the variations of this scheme.
(8) False Claims for Refund and Requests for Abatement: Many employing this scam have not previously filed tax returns. This involves a taxpayer requesting abatement of previously assessed tax using Form 843 "Claim for Refund and Request for Abatement". The filer uses Form 843 to list reasons for the request and is often a taxpayer for which the IRS has calculated the tax and filed a "substitute return" on behalf of the taxpayer. Often, one reason given for filing the Form 843 is that the IRS, when they prepared the "substitute return" on behalf of the taxpayer, had "failed to properly compute and/or calculate IRC Sec 83 - Property Transferred in Connection with Performance of Service." Keep in mind that these are false claims, and false claims can carry very significant penalties.
(9) Return Preparer Fraud: This one deals with dishonest tax preparers who, to attract new clients, promise large refunds. Thereafter, they may skim portions of tax refunds, skimming a portion of their clients' refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Taxpayers should choose carefully when hiring a tax preparer. As the old saying goes, "If it sounds too good to be true, it probably is." Be careful who you hire to prepare your tax returns and remember that no matter who prepares the return, the taxpayer is ultimately responsible for its accuracy.
(10) Disguised Corporate Ownership: Domestic shell corporations and other entities are being formed and operated in certain states for the purpose of disguising the ownership of the business or financial activity. These entities are often being used in a variety of illegal activity, including the underreporting of income, non-filing of tax returns, listed transactions, money laundering, financial crimes and possibly terrorist financing. The IRS is working with state authorities to identify these entities and to bring their owners into compliance.
(11) Misuse of Trusts: Although there are many legitimate ways of and reasons for using trusts, some "promoters" suggest the transfer of assets to trusts in order to reduce taxable income, get deductions for otherwise nondeductible personal expenses, and reduced estate or gift taxes in ways not supported by the tax laws and regulations.
(12) Abuse of Charitable Organizations and Deductions: This plan involves using a tax-exempt organization to improperly shield income or assets from taxation. A tax deduction is claimed for transferring assets or income to a tax-exempt supporting organization, where the deduction claimed is greater than the actual benefit transferred. The IRS continues to observe the use of tax-exempt organizations to improperly shield income or assets from taxation.
Involvement in tax schemes leads to problems for scam artists and taxpayers. Tax return preparers and promoters risk significant penalties, interest and possible criminal prosecution.
IRS Still Watches Scams That Fall Off the List
While the IRS has seen a decline in the occurrence of some of these scams, other problems such as abuse of the American Indian Employment Credit and misuse of structured entity credits continue to be areas of concern. The absence of a particular scheme from the Dirty Dozen should not be taken as an indication that the IRS is unaware of it or not taking steps to counter it.
If you would like to discuss this subject further, please contact Paul Santos (psantos@pmn.com) or any member of our tax service team at (617) 426-9440.
Note: This article represents a general overview of or opinion on certain tax issues or developments and should not be relied upon without an independent, professional analysis of how any of these provisions may apply to a specific situation. We recommend you consult your professional tax advisor before taking any action based on anything in this article.
IRS CIRCULAR 230 NOTICE: In compliance with U.S. Treasury Circular 230 Regulations and any applicable state laws, we hereby notify you that any tax advice contained in the body of this document, or attachments thereto, was not intended or written to be used, and cannot be used, by the recipient or any other party for the purpose of (1) avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, or (2) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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