Tuesday, March 07, 2006

Dirty Dozen IRS Tax Scams

Below is a paraphrasing of Patti Spencer's work in the "Intelligencer Journal (Lancaster, PA)

Each year the IRS issues a list annually of the top 12 tax scams. "Victims end up losing the cash they pay to the promoters of these scams, but even worse, victims often find themselves in deeper debt to the IRS."

1. Phishing. This made it to the list since some of these scammers are posing as IRS agents. "A typical e-mail notifies a taxpayer that he or she is due a tax refund and tells them to click on a hyperlink and visit an official-looking Web site." Other variations of this include fake IRS emails notifying you that you're under audit. The IRS never uses email to contact taxpayers.

2. Form 843 tax abatement.

Taxpayers request abatement of previously assessed tax using Form 843.

The filer uses the Form 843 to list reasons for the request.

The IRS says one of the reasons commonly given is: "Failed to properly compute and/or calculate IRC Sec 83 Property Transferred in Connection with Performance of Service." 3.Zero return.

In this scam, promoters instruct taxpayers to enter all zeros on their federal income tax filings.

Filers enter zero income, report their withholding and then write "nunc pro tunc" Latin for "now for then" on the return.

They often do this with amended returns in hopes the IRS will disregard the original return which reported wages and other income. 4.Zero wages.

A taxpayer attaches to his or her return either a Form 4852 Substitute Form W-2 or a "corrected" Form 1099 that shows zero or little wages or other income.

The taxpayer may include an explanation on the Form 4852 such as "statutory language behind IRC 3401 and 3121" or may include some reference to the paying company refusing to issue a corrected Form W-2 for fear of IRS retaliation.

The Form 4852 or 1099 is usually attached to a "zero return." 5.Trust misuse.

Promoters urge taxpayers to transfer assets into trusts and promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes.

These trust scams have been around for years and go by various names: Pure Trusts, Common Law Trusts, Constitutional Trusts, Freedom Trusts, Patriot Trusts and more.

The IRS reports there are currently more than 200 active investigations under way and three dozen injunctions have been obtained against promoters since 2001.

Taxpayers should seek the advice of a respected professional before entering into a trust. 6.Frivolous arguments.

Promoters have been known to make the following outlandish claims: The Sixteenth Amendment to the Constitution which gives congress power to lay and collect income taxes was never ratified; wages are not income; filing an income tax return and paying taxes are merely voluntary; and being required to file Form 1040 violates the Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy.

These arguments are false and have been thrown out of court. 7.Return preparer fraud.

Dishonest income tax return preparers attract new clients by promising large refunds.

They file incorrect returns and take part of the refund, charging exorbitant fees.

No matter who prepares your return, you, the taxpayer, are ultimately responsible for its accuracy.

Don't fall victim to these con artists. 8.Credit counseling agencies.

The IRS is in the process of revoking the tax- exempt status of numerous credit-counseling organizations that operate under the guise of educating financially distressed consumers while charging debtors large fees and providing little or no counseling.

Beware of credit-counseling organizations that claim they can fix credit ratings, push debt payment plans or impose high set-up fees or monthly service charges that may add to existing debt. 9.Abuse of charitable organizations and deductions.

The IRS has seen increased use of tax-exempt organizations to improperly shield income or assets from taxation.

An example cited by the IRS is 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, thus taking a tax deduction without really transferring a benefit to charity. 10.Offshore transactions.

Putting your money and investments in offshore accounts is not illegal.

Putting your money and investments in offshore accounts and not paying taxes on them is illegal.

Despite a crackdown by the IRS, people 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.

11.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 Code Section 861 and other parts of the tax law and has been refuted in court.

The IRS also has seen an increase in the area of "double-dip" parking and medical reimbursement issues.

12.No gain deduction.

Filers attempt to eliminate their entire adjusted gross income 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 that refers to court documents and includes the words "No Gain Realized."

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