by Richard Chapo
Each year, the IRS lists various scams taxpayers get caught up in. The top
2005 scams include several that manipulate laws governing charitable groups,
abuse credit counseling services or rely on refuted arguments to claim tax
exemptions. The agency is warning taxpayers about the growth of identity theft
schemes with some particularly bold thieves even pretending to be IRS
agents.
2005 Scam Highlights
1. Credit Counseling. The IRS warns taxpayers to be careful with credit
counseling organizations that claim they can fix credit ratings, promote 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.
2. 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.
3."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.
4. “No Gain” Deduction. - Taxpayers attempt to eliminate their entire adjusted
gross income (AGI) by deducting it on Schedule A. The filer lists their AGI
under the Schedule A section labeled “Other Miscellaneous Deductions” and
attaches a statement referring to court documents and including the words “No
Gain Realized.”
5. Corporation Sole. 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.
6. Offshore Transactions. Despite a crackdown, 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
continues to aggressively pursue taxpayers and promoters involved in such
abusive transactions.
7. 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. The IRS takes a very poor view of this
tactic.
8. 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. The employees,
however, can sue their employer for damages.
Inappropriate tax schemes come and go, so the 2005 list is fairly standard
stuff with one exception. The spread of identity theft schemes is troubling,
particularly when thieves pretend to act as IRS agents. Be careful out
there.
About the Author:
Richard Chapo is CEO of http://www.businesstaxrecovery.com - We recover overpaid business
taxes for small businesses. 80% are due refunds of $5,000 to $10,000 on past
tax filings. How much you are owed?
