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The IRS’ “Dirty Dozen” Tax Scams -
3-1-05
WASHINGTON — The Internal Revenue Service
today unveiled its annual listing of notorious tax scams, the “Dirty
Dozen,” reminding taxpayers to be wary of schemes that promise to
eliminate taxes or otherwise sound too good to be true.
The “Dirty Dozen” for 2005 includes
several new scams that either manipulate laws governing charitable
groups, abuse credit counseling services or rely on refuted
arguments to claim tax exemptions. The agency also sees the
continuing spread of identity theft schemes preying on people
through e-mail, the Internet or the phone, sometimes with con
artists posing as representatives of the IRS.
“The Dirty Dozen is a reminder that tax
scams can take many forms,” IRS Commissioner Mark W. Everson said.
“Don’t be fooled by false promises peddled by scam artists. They’ll
take your money and leave you with a hefty tax bill.”
Involvement with tax schemes can lead to
imprisonment and fines. The IRS routinely pursues and shuts down
promoters of these scams. But taxpayers should also remember that
anyone pulled into these schemes on the return. can face repayment of taxes
plus interest and penalties.
Persons who suspect tax fraud can call
the IRS at 1-800-829-0433.
The Dirty Dozen
The IRS urges
people to avoid these common schemes:
1.
Trust
Misuse.
Unscrupulous promoters for years have urged taxpayers to transfer
assets into trusts. They promise reduction of income subject to tax,
deductions for personal expenses and reduced estate or gift taxes.
However, some trusts do not deliver the promised tax benefits, and
the IRS is actively examining these arrangements. More than two
dozen injunctions have been obtained against promoters since 2001,
and numerous promoters and their clients have been prosecuted. As
with other arrangements, taxpayers should seek the advice of a
trusted professional before entering into a
trust.
2.
Frivolous
Arguments. Promoters
have been known to make the following outlandish claims: that the
Sixteenth Amendment concerning congressional power to lay and
collect income taxes was never ratified; that wages are not income;
that filing a return and paying taxes are merely voluntary; and that
being required to file Form 1040 violates the Fifth Amendment right
against self-incrimination or the Fourth Amendment right to privacy.
Don’t believe these or other similar claims. Such arguments are
false and have been thrown out of court. While taxpayers have the
right to contest their tax liabilities in court, no one has the
right to disobey the law.
3.
Return
Preparer Fraud. Dishonest
return preparers can cause many headaches for taxpayers who fall
victim to their ploys. Such preparers derive financial gain by
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 saying goes, if it sounds too good to
be true, it probably is. No matter who prepares the return, the
taxpayer is ultimately responsible for its accuracy. Since 2002, the
courts have issued injunctions ordering dozens of individuals to
cease preparing returns, and the Department of Justice has filed
complaints against dozens of others, which are pending in court.
4.
Credit
Counseling Agencies. Taxpayers
should be careful with credit counseling organizations that claim
they can fix credit ratings, push debt payment agreements or charge
high fees, monthly service charges or mandatory “contributions” that
may add to debt. The IRS Tax Exempt and Government Entities Division
has made auditing credit counseling organizations a priority because
some of these tax-exempt organizations, which are intended to
provide education to low-income customers with debt problems, are
charging debtors large fees, while providing little or no
counseling.
5.
"Claim of
Right" Doctrine. In this
scheme, a taxpayer files a return and attempts to take a deduction
equal to the entire amount of his or her wages. The promoter advises
the taxpayer to label the deduction as “a necessary expense for the
production of income” or “compensation for personal services
actually rendered.” This so-called deduction is based on a
misinterpretation of the Internal Revenue Code and has no basis in
law.
6.
“No Gain”
Deduction. Similar to
“Claim of Right,” filers attempt to eliminate their entire adjusted
gross income (AGI) by deducting it on Schedule A. The filer lists
his or her AGI under the Schedule A section labeled “Other
Miscellaneous Deductions” and attaches a statement to the return,
referring to court documents and including the words “No Gain
Realized.”
7.
Corporation
Sole. Since
September 2004, the Department of Justice has obtained six
injunctions against promoters of this scheme and filed complaints
against 11 others. Participants apply for incorporation under the
pretext of being a “bishop” or “overseer” of a one-person, phony
religious organization or society with the idea that this entitles
the individual to exemption from federal income taxes as a
nonprofit, religious organization. When used as intended,
Corporation Sole statutes enable religious leaders to separate
themselves legally from the control and ownership of church assets.
But the rules have been twisted at seminars where taxpayers are
charged fees of $1,000 or more and incorrectly told that Corporation
Sole laws provide a “legal” way to escape paying federal income
taxes, child support and other personal debts.
8.
Identity
Theft. It pays to
be choosy when it comes to disclosing personal information. Identity
thieves have used stolen personal data to access financial accounts,
run up charges on credit cards and apply for new loans. The IRS is
aware of several identity theft scams involving taxes. In one case,
fraudsters sent bank customers fictitious correspondence and IRS
forms in an attempt to trick them into disclosing their personal
financial data. In another, abusive tax preparers used clients’
Social Security numbers and other information to file false tax
returns without the clients’ knowledge. Sometimes scammers pose as
the IRS itself. Last year the IRS shut down a scheme in which
perpetrators used e-mail to announce to unsuspecting taxpayers that
they were “under audit” and could set matters right by divulging
sensitive financial information on an official-looking Web site.
Taxpayers should note the IRS does not use e-mail to contact them
about issues related to their accounts. If taxpayers have any doubt
whether a contact from the IRS is authentic, they can call
1-800-829-1040 to confirm it.
9.
Abuse of
Charitable Organizations and Deductions. The
IRS has observed an increase in the use of tax-exempt organizations
to improperly shield income or assets from taxation. This can occur,
for example, when a taxpayer moves assets or income to a tax-exempt
supporting organization or donor-advised fund but maintains control
over the assets or income, thereby obtaining a tax deduction without
transferring a commensurate benefit to charity. A “contribution” of
a historic facade easement to a tax-exempt conservation organization
is another example. In many cases, local historic preservation
laws already prohibit alteration of the home’s facade, making the
contributed easement superfluous. Even if the facade could be
altered, the deduction claimed for the easement contribution may far
exceed the easement’s impact on the value of the property.
10.
Offshore
Transactions. Despite a
crackdown on the practice by the IRS and state tax agencies,
individuals continue to try to avoid U.S. taxes by illegally hiding
income in offshore bank and brokerage accounts or using offshore
credit cards, wire transfers, foreign trusts, employee leasing
schemes, private annuities or life insurance to do so. The IRS,
along with the tax agencies of U.S. states and possessions,
continues to aggressively pursue taxpayers and promoters involved in
such abusive transactions.
11. Zero
Return. Promoters
instruct taxpayers to enter all zeros on their federal income tax
filings. In a twist on this scheme, filers enter zero income, report
their withholding and then write “nunc pro tunc”–– Latin for “now
for then”– on the return.
12. Employment Tax
Evasion. The IRS
has seen a number of illegal schemes that instruct employers not to
withhold federal income tax or other employment taxes from wages
paid to their employees. Such advice is based on an incorrect
interpretation of Section 861 and other parts of the tax law and has
been refuted in court. Recent cases have resulted in criminal
convictions, and the courts have issued injunctions against more
than a dozen persons ordering them to stop promoting the scheme.
Employer participants can also be held responsible for back payments
of employment taxes, plus penalties and interest. It is worth noting
that employees who have nothing withheld from their wages are still
responsible for payment of their personal taxes.
Other Scams Still
Lingering
The IRS removed four scams
from the Dirty Dozen this year: slavery reparations, improper
home-based businesses, the Americans with Disabilities Act and EITC
dependent sharing. The agency has noticed declines in activity in
some of these schemes. But taxpayers should remain wary because the
IRS has seen old scams resurface or evolve. Moreover, the IRS
reminds taxpayers to be vigilant about cons that may not be on the
Dirty Dozen list. New tax scams or schemes routinely pop up,
especially around tax time.
03-01-05
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