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"While taxpayers have the right
to contest their tax liabilities in court,
no one has the right
to disobey the law."
- IRS Web site |
The 2007 Dirty Dozen list is new, but the story is old. As long as there are taxes, there will be tax scams. Every year, hucksters crawl out of the woodwork, claiming to have the magic wand which, for a fee, they will wave over a tax return, make the tax liability disappear, and render the IRS impotent.
Here's a breakdown of the year's top 12 smoke-and-mirror scams that can lead unsuspecting taxpayers into serious legal jeopardy:
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Milking the Telephone Tax Refund | This is a legitimate, one-time refund intended to give back the federal excise tax that has been improperly collected on certain phone services. If they have good records, taxpayers can opt to claim the actual amount paid in (instead of a standard refund), which should be a maximum of three percent tax paid on long distance and bundled service for March 2003 through July 2006 phone bills. But some taxpayers are filing for refunds of the entire cost of those phone bills. The IRS is investigating such claims and will take action against taxpayers and the preparers who assist them.
Some advisers are encouraging taxpayers to get around the annual maximum Roth IRA contribution of $4,000 (or $5,000 depending on age) by shifting under-valued property to a Roth IRA, with the goal of avoiding taxes on otherwise taxable income
This is a returnee to the Dirty Dozen list. Phishers are using the Internet to pose as IRS agents or representatives of financial institutions. They send fictitious e-mails, hoping to trick taxpayers into revealing sensitive information. The bogus messages inform the taxpayer that a refund is available, which they can only claim by clicking on a hyperlink. The link takes the taxpayer to an official-looking Web site, and then asks for sensitive information like a credit card number or Social Security number.
The IRS reminds the public that it does not use e-mail to initiate contact with taxpayers about issues related to their accounts. To verify whether a contact from the IRS is authentic, call 1-800-829-1040.
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Camouflaged Corporate Ownership | Those wishing to hide the true ownership of a source of revenue or to provide cover for financial crimes, money laundering, or the funding of terrorist activity sometimes do so by forming domestic shell corporations or other entities. The IRS is working with state authorities to identify these organizations and bring them into compliance.
This scam was new last year and is back again. The taxpayer files a Substitute W-2 or a "corrected" 1099 with his federal return, showing little or no income, generally with an explanation which seeks to rebut previously filed W-2s or 1099s. The explanation may claim that the payer on the original forms refused to file corrections out of fear of retaliation from the IRS, and may cite language in Internal Revenue Code sections 3401 and 3121.
"Taxpayers shouldn't let their guard down. Don't get taken by scam artists making outrageous promises. If you use a tax professional, pick someone who is reputable. Taxpayers should remember they are ultimately responsible for what is on their tax return even if some unscrupulous preparers have steered them in the wrong direction."
- Mark V. Everson, IRS Commissioner |
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Unscrupulous Tax Preparers | Shady tax preparers entice consumers with promises of larger refunds than competitors can deliver. They may charge inflated fees or base their fees on the size of the refund, and may not bother to examine a client's documentation to support deductions and expenses. In 2006, 109 tax preparers were convicted of tax crimes and sentenced to prison for an average of 18 months, and many more are under investigation.
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American Indian Employment Credit | There is a legitimate credit available to some businesses that employ Native Americans or their spouses. Individuals are not entitled to this credit, yet some use it to try to substantially reduce their taxable income. In a related scam, promoters maintain that Native Americans are not subject to federal taxes, and urge them to seek relief by filing form W-8 BEN.
In this old tax dodge, a promoter convinces a taxpayer that he can reduce his taxable income and his estate and gift taxes and create additional personal expense deductions by transferring assets into a trust. With over 150 abusive trusts currently under investigation and injunctions against 49 promoters of abusive trusts since 2001, the IRS warns taxpayers to consider a trust only with the guidance of their seasoned financial advisers.
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Structured Entity Credits | Not a new scheme, though new to the Dirty Dozen this year. This plan involves establishing partnerships for the sole purpose of owning and selling credits, including state and federal conservation easement credits. Once the credits are exhausted, each partner receives a K-1 to claim on his or her individual return, showing a total loss of the initial investment. The IRS states that these investments are not valid because they have no viable business purpose, therefore they do not represent deductible losses.
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Charitable Contribution Fraud | This scam takes many forms, from overvaluing noncash contributions, to disguising tuition payments made to religious organizations as charitable contributions, to claiming a tax deduction for assets or income transferred to a tax-exempt organization, yet not relinquishing control of the assets or income.
Promoters advise taxpayers to use Form 843 to request an abatement of taxes previously paid or assessed, commonly citing reasons such as, "Failed to properly compute and/or calculate IRC Sec 83-Property Transferred in Connection with Performance of Service." Often the taxpayer has not filed a tax return for the year in question, but has been assessed taxes by the IRS through the Substitute Return Program.
Though proven false and thrown out of court year after year, taxpayers still try frivolous arguments like these:
- Forcing taxpayers to file tax returns violates the Fourth Amendment right to privacy or...
- The Fifth Amendment right to avoid self-incrimination
- Wages are not income
- Congress has no power to lay or collect taxes because the Sixteenth Amendment was never ratified
- Paying taxes is optional (based on language in the tax code that calls taxes voluntary because we calculate and file our own tax returns, rather than relying on the government as some countries do).
Each year, some scams are new to the Dirty Dozen list, while others drop off. That is not to suggest that the scams which fall off the list should be of less concern to taxpayers. Yesterday's scams are still very much on the IRS radar and will be investigated as they are uncovered.
Reporting Suspected Tax Fraud Activity
Report suspected tax fraud on IRS Form 3949-A, Information Referral, available on the IRS Web site at IRS.gov or by calling 1-800-829-3676. Address your correspondence to, IRS, Fresno, CA 93888. Include as much specific information as possible, including: the person suspected, the date of the activity, how it became known, amounts involved, and other details that may be helpful. You may request anonymity and there may be a reward available.
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