|
|
|
|
| The Basics | 12 tax scams that could cost you
|
As April 15 nears, watch out for con artists who try to convince you they can cut or eliminate income taxes entirely.
By Bankrate.com
Taxpayers are always looking for ways to cut tax bills. Unfortunately, scam operators are always looking for filers who are eager to find tax breaks.
Con artists work year-round, but as April 15 nears, tax-specific scams hit high gear. The Internal Revenue Service warns that people could fall prey to unscrupulous preparers, identity thieves or less-than-helpful credit counselors. Then there are the perennial rip-offs, such as dubious offshore transactions and abusive trust schemes. And some folks can't even trust their bosses, with work-related scams still popular.
It's bad enough that scam victims, believing promises of lower tax bills, end up losing cash. But even worse, they subsequently find themselves in deeper debt to the IRS. The reason: Even if you are duped, federal law requires you pay your rightful taxes plus any penalty charges and back interest that accrued because of your use of questionable tax-relief techniques.
Most of the schemes are patently false. Others take real tax breaks, or portions of legal write-offs, and illegally apply them.
Here are 12 common and potentially costly ways you could lose money to more than just the IRS if you're not careful.
Credit counseling cautions
A lot of people find tax-filing time is also a good time to evaluate their overall financial situations. And some, while filling in all those IRS forms, discover that they need outside money management help. Unfortunately, this move sometimes causes more trouble.
Complaints about credit-repair companies have been increasing during the last few years. That's why the IRS joins consumer watchdogs in urging taxpayers to thoroughly check out credit-counseling agencies before signing up for any program. And don't be swayed simply because a counseling service advertises itself as not-for-profit. Many credit-repair organizations do provide valuable financial counseling and education and are legitimate nonprofit groups. But others fail to meet federal tax-exempt standards.
Some organizations might have qualified for tax-exempt status in the past, says the IRS, but no longer do so because of changes in their services. For example, an organization that puts clients on fixed payment plans to pay down their debt and offers only that service, without significant education and counseling, would not qualify for tax-exempt status.
The IRS's Exempt Organizations office continues to examine consumer-credit organizations to ensure that they operate in a legitimately tax-exempt manner. And the agency warns consumers to be wary of quick fixes, whether during tax-filing season or year round, that could actually drive them deeper into debt.
'Claim of Right' doctrine
Wouldn't it be great if you could use your income itself as a deduction to essentially get to a zero earnings level? No income, no tax bill. This scam says that's possible. It's not.
Under what con artists are calling the "claim of right," perpetrators of this tax dodge assert that a taxpayer can deduct all of his or her wages as "a necessary expense for the production of income" or "compensation for personal services actually rendered." Sure, it's perfectly legal to deduct unreimbursed expenses you encountered while doing your job, but not your total wages. The IRS says this scam is "based on a complete misinterpretation of the Internal Revenue Code and has no basis in law." Try it, and you'll hear from an auditor.
Corporation Sole
It's true that religious groups are treated differently under the tax laws, but only if they are legitimate and meet IRS guidelines. The Corporation Sole statutes, when used as intended, allow religious leaders (usually bishops or parsons) to incorporate as individuals in order to separate themselves legally from the control and ownership of church assets.
But in this scam, con artists convince individuals to apply for incorporation under false religious pretexts so that they, too, are entitled to exemption from federal income taxes as a nonprofit, religious organization. The promise -- totally false, says the IRS -- is that Corporation Sole provides an individual a "legal" way to escape paying federal income taxes, child support and other personal debts.
In addition to eventually running into trouble with the IRS, victims of this scam also are usually out pre-filing money. Con artists have been charging up to $1,000 or more per person to sell the details of this tax-avoidance scheme.
Offshore tax shelters
It's not illegal to have a credit card issued by an offshore institution. However, it is illegal to hide taxable income, and the IRS says that's exactly what a growing number of people are doing when they open accounts in tax-haven countries. This scam was number one during the 2003 tax season. It's still near the top, but concentrated IRS efforts in this area (along with an amnesty program last year) yielded more than $170 million in taxes, interest and penalties associated with illegal offshore accounts. The IRS says its agents and state law officers will continue to aggressively pursue taxpayers and promoters in this area.
Not withholding taxes from your paycheck
Illegal schemes arguing that employers don't have to withhold federal income tax or employment taxes from employees' wages continue to crop up nationwide. These scams rely on an interpretation of tax law that wages are not a "source" of income and that the definition of "sources of income" does not apply to individuals. Scam operators usually cite Section 861 of the tax code as the basis for their non-withholding claims.
The IRS categorically rejects such arguments. So did the jury that heard the case of Al Thompson, the California businessman who became a tax-protest hero when he refused to withhold taxes from the pay of workers at his small manufacturing plant. In January, Thompson was found guilty on 13 of the 14 tax-evasion charges he faced, including filing a false tax return, filing false claims against the government and willful failure to withhold and pay taxes.
Thompson's case was one of the most high-profile to date, but he is not the only tax protester to face federal charges. Since 2001, the Justice Department has stepped up pursuit of similar cases in both the civil and criminal courts. Convicted tax evaders usually are ordered to make restitution to the government for the unpaid taxes, as well as face additional penalties. Government officials say Thompson's actions cost the U.S. Treasury $256,000.
But tax-protesting bosses aren't the only ones who could face tax consequences. Individual workers still are ultimately responsible for personal tax payments -- income, Social Security and Medicare -- even when an employer refuses to withhold them. If these taxes aren't withheld regularly from paychecks, a taxpayer could face a huge tax bill in April, plus penalties and interest for not paying throughout the year as income was earned.
The IRS urges persons concerned about an employer and employment taxes to call the agency toll-free at 1-800-829-1040.
Return preparer fraud
Joining the "just who can you trust?" ranks of bosses who mislead employees are unscrupulous tax professionals who bilk clients. Unethical return preparers make money from duped customers by diverting a portion of the taxpayer's refund for their own benefit. The IRS warns that they also tend to charge inflated fees for their services and increase their clientele by advertising guaranteed larger refunds. This swindle underscores the need for all taxpayers to choose carefully when hiring a tax preparer. A key reason for such care: No matter who prepares the return, the taxpayer is ultimately responsible for all of the information on the 1040.
Illegitimate trusts
Trusts are a legitimate and frequently used financial-planning tool, where a taxpayer's money is controlled and managed by an independent trustee. In many cases, they do offer tax advantages. But the urge to cut taxes, combined with insufficient understanding of IRS trust requirements, often makes taxpayers easy marks for self-styled experts promising to reduce or eliminate taxes through illegal trust investments. This tax season, such abusive trust schemes lead Uncle Sam's list of scams.
Promoters of abusive tax transactions are increasingly urging taxpayers to transfer assets into trusts. The promoters promise a variety of benefits: a reduction of income subject to tax, deductions for personal expenses paid by the trust and a decrease in gift or estate taxes. But abusive trust arrangements, warns the IRS, will not produce the advertised tax benefits. The IRS is actively examining suspect trusts and has obtained more than a dozen injunctions against promoters of illegal programs. Many of those con artists, along with their clients, have been criminally prosecuted.
Don't simply take any tax-trust sales pitch at face value. Before entering any trust arrangements, seek the advice of a trusted tax professional.
Special refund for African-Americans
Thousands of African-Americans have been misled for years by people offering to file for tax credits or refunds related to reparations for slavery. This scam has a distant factual basis. Shortly after the Civil War, Congress voted to provide former slaves with 40 acres and a mule as payback for their years in slavery. President Andrew Johnson vetoed the bill. Though politicians and various media discuss the reparations issue for descendants periodically, there currently is no tax law that allows for any slavery-related tax breaks.
Some unscrupulous promoters encourage clients to pay them to prepare a claim (a misfiling of Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains) for this invalid refund. But the claims are a waste of money. Plus, those who file subsequent claims can be subject to a $500 frivolous return penalty.
Improper home-based business
Lots of people run their own business from home, either as a main job or to supplement wage income. Such ventures also can provide several tax-saving deductions. But to meet IRS muster when claiming such breaks, the home-based business must be legitimate. Don't necessarily believe -- or pay -- promoters of work-at-home plans that purport to make all your personal expenses tax deductible. Tax laws clearly state that a business must have a clear business purpose and profit motive before the operator can claim business expenses.
'I don't pay taxes. Why should you?'
In these cases, con artists boast about how they don't file or pay taxes. They're happy to share their "secret" -- for a fee. You may have seen the ads or the e-mail: "Untax yourself for $49.95." If you buy this con and accompanying how-to material, you'll ultimately find yourself out a lot more money. You'll hand over the price of the fake tax-saving secret and also face civil and criminal tax penalties.
As for the bogus tax-avoidance scheme sellers, the IRS says several have been convicted on criminal tax charges, and more than a dozen injunctions to halt the ploy have been issued.
Tax-related identity theft
Identity theft is the No. 1 consumer complaint and the crime can easily escalate during tax season. The IRS is aware of several identity theft scams involving taxes or the IRS. In one, tax preparers allegedly used client information, such as Social Security numbers and financial data, to commit identity theft. In another, bank customers received fictitious letters and purported tax forms in an attempt to trick them into disclosing personal and banking data. These scams underscore the need to always be careful about revealing personal and financial information (in and out of tax season) and to make sure you select a reputable tax professional. (Read "10 ways to stop identity theft cold" to learn more about protecting yourself from identity theft.)
Sharing tax-credit dependents
The earned-income credit offers lower-income workers a way to save on taxes. The tax break is bigger for taxpayers who are supporting children. To get the maximum credit, a filer need only claim two children as dependents. Unscrupulous tax preparers sometimes "borrow" one client's "extra" kids and transfer them to another filer's return to illegally manufacture this tax break. For example, Joe has four youngsters. His preparer properly lists two of Joe's children to claim the full earned income tax credit. However, Joe's other two kids are listed on the childless Jane's return to illegally get her the same tax saving.
Often, reports the IRS, the preparer convinces clients to participate in the bogus claim by offering to split the tax refund money generated by the illegal claim. The tax pro could face criminal charges, and civil penalties could be assessed the taxpayers.
IRS offices across the country are well aware of these dirty dozen tax scams. The agency says it is aggressively pursuing and prosecuting promoters, along with many of their clients, for fraud and tax evasion.
If you encounter any of these schemes, or are approached with a new one, the agency wants to know. For a phone number and address to report suspected tax fraud, click on the link in the left sidebar.
And it never hurts to be a little skeptical.
"Taxpayers should think carefully before paying for services or signing important documents," says IRS Commissioner Mark W. Everson. "Don't be fooled by these outrageous claims. There is no secret way to escape paying taxes."
-- By Kay Bell
|
|
|
|
