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In these trying economic times, with Housing Foreclosures at all-time highs, an unemployment rate of over 10%, and soaring health care costs, more and more Americans are becoming frustrated with their Federal Government, resulting in increased numbers of taxpayers turning to financial and tax advisers whose advice and methodology are of questionable legitimacy. As a result, the IRS has recently published it's list of the twelve most commonly attempted income tax related schemes – what the Treasury Department is calling the "Dirty Dozen."
According to IRS commissioner Doug Shulman, "Taxpayers should be wary of scams to avoid paying taxes that seem too good to be true … There is no secret trick that can eliminate a person's tax obligations. People should be wary of anyone peddling any of these scams. "
First on the list, "Phishing" is a term familiar to most computer and internet savvy Americans, in which internet-based con artists trick their victims into turning over their private / personal data, allowing the criminals to obtain access to bank accounts, lines of credit, etc. According to the IRS.gov website, "The IRS never initiates unsolicited e-mail contact with taxpayers about their tax issues. Taxpayers who receive unsolicited e-mails that claim to be from the IRS can forward the message to phishing @ irs.gov. "
Next, one of the oldest of the tax avoidance scams, "Hiding Income Offshore." For decades, taxpayers have attempted to evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans. Recently, the IRS provided guidance to auditors on how to deal with those hiding income offshore in undisclosed accounts.
The Identification of Taxpayers who are engaged in "Filing False of Misleading Forms" to claim refunds that they are not entitled to will be a major concern of the IRS in the upcoming tax season. The filing of Frivolous information returns, claiming false withholding credits, even the argument that a "straw man" bank account has been created by our government for each citizen, are the most common claims that fall into this category.
I'm certain that many people remember the troubles that former President Bill Clinton had with his income taxes, most notably, his claims that used underwear he donated to charity had a value of several dollars per pair. The IRS continues to observe the "Misuse of Charitable Organizations and Deductions." Abuse includes arrangements to improperly shield income or assets from taxation, attempts by either to maintain control over donated assets, and overvaluing of donations of real property, as in the Clinton example.
"Return Preparer Fraud" has created many headaches for taxpayers who fall victim to their schemes. Many dishonest return preparers skim off of their clients refunds, charge overinflated fees in exchange for promises of large refunds, often demanding a percentage of said refund. Worst of all, no matter who prepares the return, the taxpayer is ultimately responsible for its accuracy, meaning that taxpayers taken advantage of by these scammers are left 'high and dry' when the IRS eventually audits their return. According to the IRS website, "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." So remember – if it sounds too good to be true, it probably is!
"Frivolous Arguments" – that is, schemes encourage people to make unreasonable and unfounded claims to avoid paying the taxes they owe – are also being watched out for by the IRS. These arguments include claims that 'income' is not defined by the Internal Revenue Code, that only government employees are subject to tax, that income tax is unconstitutional, and many others. In addition to taxes, penalties, and interest, persons filing returns citing claims which have been deemed "frivolous" by the US Tax Court are subject to a fine of up to $ 5000.
Many taxpayers believe that the salary which they earn is not subject to tax due to the fact that they have exchanged an object of value – their work – for an object of equal value – money – and therefore, they had no taxable gain. In cases such as this, the IRS will assess tax through the "Substitute for Return Program", wherein which the IRS files a return on the taxpayers on behalf. This has resulted in the IRS being inundated with what they have deemed "False Claims for Refund and Requests for Abatement" – Taxpayers filing Forms 843 (Request for Abatement). These claims are being treated as frivolous arguments – and persons making the claims are subjected to tax, penalties, interest, and fines.
Along the same line is the rising practice of reporting "Zero Wages" on returns. There are dozens of reasons proffered by tax protesters as to why they do not consider 'wages' to be 'income' for the purposes of tax reporting – and most of these reasons have been deemed frivolous by the US Tax Courts. All that needs to be said on this subject is that the primary promoters of this idea – Irwin Schiff and Peter Hendrickson – are currently serving time in federal prisons for tax fraud related crimes.
Speaking of incarcerated Tax Advisers, another scheme being monitored by the IRS is the "Misuse of Trusts" to decrease tax liability. Promoters of this scam charge taxpayers huge fees to establish what they call "Pure Trusts" or "Constitutional Trusts" – which they claim are tax exempt. This is technically true – the trusts have no tax liability – because said liability is the responsibility of the taxpayer who established the trust.
Another matter that the IRS has begun to take more seriously is the use of "Abusive Retirement Plans." As many taxpayers move from job to job, sometimes, their benefits follow them – including their IRAs. Many taxpayers attempt to reduce their tax liability by contributing to their IRAs in amounts in excess of the contribution limitations, improperly labeling disbursements from said accounts, or funneling funds through corporate entities in order to circumvent tax laws. Criminal prosecution can be taken against persons abusing such accounts.
The IRS also keeps an eye out for what they call "Disguised Corporate Ownership" – Taxpayers who establish corporate entities for the purposes of under reporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes, and even terrorist financing. The IRS is working alongside of state and federal policing agencies to identify and prosecute perpetrators of these schemes.
"Fuel Tax Credit Scams" are becoming more and more prevalent as well. Many businesses, farms for example, may legitimately claim fuel tax credits for business use of fuel; However, some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable.
How can you profit from this information? First – don't get taken advantage of! Persons who attempt the schemes listed in the "Dirty Dozen" are at high risk of criminal prosecution; or, at minimum, civil action. Also, if you are aware of anyone attempting to defraud the IRS, whistle blowers that provide allegations of fraud to the IRS and may be eligible for a reward, and are encouraged to go to IRS.gov for more information.