The Internal Revenue Service (IRS) released a news alert at the beginning of March regarding the most common tax scams for taxpayers to avoid.
The IRS intends to strictly enforce the law against those who perpetuate scams and taxpayers who make false claims in order to avoid paying taxes. The most common tax scams for 2004 are listed below.
The misuse of trusts – The IRS warns taxpayers not to pay attention to promoters who promise tax benefits to those who transfer their assets into trust. Some of the promises made by promoters are a reduction in taxable income, deductions for personal expenses paid out of the trust, and the reduction of gift or estate taxes. These are empty promises. The IRS is currently investigating the abuse of trust arrangements to avoid paying taxes.
The “claim of right“ doctrine – Promoters may advise taxpayers to deduct an amount equal to the sum of their wages under the claim that the deduction is “a necessary expense for the production of income” or compensation for services rendered. The deduction is not allowed under the law.
Corporation Sole – The intent of the Corporation Sole statutes is to allow religious leaders, such as bishops or parsons, to incorporate and thus hold property and conduct business on behalf of their religious organization. The statutes also exempt nonprofit, religious organizations from paying federal income taxes. However, individual taxpayers are claiming to be the heads of phony religious organizations in order to avoid paying income taxes. Promoters also mislead individuals into believing the Corporation Sole statutes allow them to legally escape paying income taxes, child support, and other personal debts.
Offshore transactions – A taxpayer cannot avoid paying U.S. taxes by using overseas bank accounts, brokerage accounts, credit cards, trusts, wire transfers, offshore employee leasing, or any other foreign arrangements.
Employment tax evasion – Tax schemes that instruct employers not to withhold federal income tax or other taxes from their employee’s wages are unlawful. Employers who follow this tax advice are subject to back payments of taxes, penalties and interest.
Return preparer fraud – Taxpayers should always be careful when choosing a return preparer. Some return preparers may advertise guaranteed larger refunds, take a portion of a taxpayer’s refund for their own benefit, or charge an astronomical fee for tax return services.
Americans With Disabilities Act – Promoters may persuade taxpayers to purchase equipment and services that allegedly qualify the taxpayer for the Disabled Access Credit under the Americans With Disabilities Act. The promoter may require a minimal payment and a signed nonrecourse note. In fact, the promoter is overcharging for insignificant services.
Slavery reparations – African-Americans should beware of others who offer to file a claim for tax credits or refunds as part of a slavery reparation scheme. The tax law does not provide for reparations for slavery. Promoters of this scheme have been imprisoned, and taxpayers who do not withdraw the claim may be subject to a fine. Also, Native Americans should not believe any promoter who offers to file a claim for reparations based on the injustice done to the Native American people.
Improper home-based business – Promoters may advise taxpayers that they can deduct personal expenses as business expenses by setting up a bogus home-based business. However, deductions for a home-based business are only allowed if the taxpayer can prove he has a clear business purpose and profit motive.
- Frivolous arguments – The IRS has recently been bombarded with frivolous arguments for tax avoidance. The following frivolous arguments will not be tolerated by the IRS:
- the 16th amendment, which grants the federal government the power to levy income tax, is unconstitutional;
- tax returns are voluntary, not mandatory;
- domestic income is not taxable;
- payroll taxes are voluntary;
- individuals are not “citizens” for tax purposes;
- individuals can avoid the payment of taxes by filing tax returns showing zero income/zero liability;
- taxpayers do not have to file official tax returns;
- taxpayers can “disclaim” their liability;
- social security is refundable; and
taxpayers need only pay taxes when they agree with government expenditures.
Identity theft – Taxpayers should beware of identity thieves who may file fraudulent tax returns in the taxpayer’s name, in addition to charging to the taxpayer’s credit card or applying for a loan under the taxpayer’s name. The IRS warns taxpayers to be careful when disclosing personal and financial information, and when choosing a tax professional for aid in preparing annual tax returns.
- The Sharing of EITC Dependents – Some tax return preparers may divide a number of children among clients in order to qualify more clients for the Earned Income Tax Credit (EITC). For example, if one client has more than enough children to qualify to claim the EITC, a tax return preparer may add the excess number of children to another client’s tax return so that he may also qualify for the EITC. Often, the tax preparer and the client “sharing” or “lending” the children will split a fee. Both are subject to penalties.
For more information, please visit www.irs.gov. The above information was taken from Internal Revenue News Release IR-2004-26. If you suspect tax fraud, you can report it to the IRS by calling 1-800-829-0433.