By Paul N. Gada, CCH Financial Planning Toolkit Staff Writer
The IRS has issued its annual "Dirty Dozen" consumer alert that cautions taxpayers about various tax scams that promise to reduce or eliminate taxes. This year's list includes two new tax scams, "zero wages" and "Form 843 tax abatement," in which filers use IRS forms to claim that their tax bills have been wrongly inflated.
Several schemes continue on the "Dirty Dozen" list from last year, but two scams have dropped off the list. The two dropped are the "claim of right" and the "corporation sole" scams. IRS personnel noticed less activity in these scams over the past year following court cases against a number of promoters.
The IRS urges people to avoid the following tax schemes:
Zero wages. In this scam, 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.
Form 843 Tax Abatement. This scam involves the filer requesting abatement of previously assessed tax using Form 843. Many using this scam have not previously filed tax returns, and the tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program.
Phishing. This is an Internet-based technique used by identity thieves to acquire personal financial data in order to gain access to the financial accounts of unsuspecting consumers, run up charges on their credit cards or apply for new loans in their names. These criminals pose as representatives of a financial institution or as the IRS and send out fictitious e-mail correspondence in an attempt to trick consumers into disclosing private information. The IRS does not use e-mail to initiate contact with taxpayers about issues related to their accounts. Taxpayers should contact the IRS if they have any doubt regarding whether a contact from the IRS is authentic.
Zero returns. Returns with all zeros are not valid.
Trust misuse. Promoters have urged taxpayers to transfer assets into trusts to reduce taxes. Taxpayers should seek the advice of a trusted professional before entering into a trust.
Frivolous arguments. These include various constitutional arguments and claims that filing and paying taxes is voluntary.
Return preparer fraud. Return preparer fraud generally involves the preparation and filing of false income tax returns by preparers who claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions on returns prepared for their clients. The IRS reminds taxpayers that "if it sounds too good to be true, it probably is," and that taxpayers are ultimately responsible for the accuracy of their returns.
To assist taxpayers with this particular problem, the IRS also has issued a fact sheet that includes helpful hints for choosing a return preparer. In addition, the fact sheet reports criminal investigation statistical information on return preparer fraud, case summaries of criminal and civil legal actions against some return preparers, and how to report suspected tax fraud activity.
Credit counseling agencies. Agencies that claim they can fix credit ratings, push debt payment agreements or charge high amounts for their services are suspect. The IRS Tax Exempt and Government Entities Division is in the process of revoking the tax-exempt status of these abusive agencies.
Abuse of charitable organizations and deductions. The IRS has observed increased use of tax-exempt organizations to improperly shield income or assets from taxation. This occurs when the amount of a tax deduction is not commensurate with the benefit to the charity.
Offshore transactions. The IRS continues to aggressively pursue individuals trying 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.
No gain deduction. Under this scheme, filers attempt to eliminate their entire adjusted gross income by deducting it on Schedule A with the words "No Gain Realized" included in the filing. This has no basis in law.
Employment tax evasion. Arguments that encourage employers not to withhold federal income tax or other income taxes based on an incorrect interpretation of the related tax code have been repeatedly refuted in court.
While the IRS routinely pursues and shuts down promoters of these scams, it reminds individuals that anyone pulled into the schemes can face repayment of taxes plus interest and penalties. Parties who suspect tax fraud are encouraged to report it to the IRS by calling 1-800-829-3676.
Keep in mind that it's very easy to avoid the above tax scams by staying well informed and remaining virtuous. For those who are easily led astray, however, remember that the IRS knows all about these tricks and will be looking to administer some tough love to help get people on the right path.
Have a happy and audit-free tax season!
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Added to the news on February 20, 2006.
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