By Paul N. Gada, Toolkit Staff Writer
The IRS recently issued its annual "Dirty Dozen" consumer alert that cautions taxpayers about falling victim to a variety of tax scams. This year's list includes several new scams, most notably fraudulent claims in connection with the special telephone excise tax refund. Also new to this year's list are scams related to Roth IRAs, domestic shell corporations, the Indian employment credit and structured entities.
Several schemes continue on the list from last year, but five scams have dropped off the list. However, the IRS warns that certain scams, such as offshore abusive transactions, continue to be areas of concern and that the IRS will continue to monitor and counter scams that have dropped off the list.
The IRS urges people to avoid the following tax schemes:
- Telephone excise tax refund abuses. The IRS has received improper requests for the special telephone tax refund. It is investigating potential abuses and will take action against taxpayers who claim improper refund amounts and return preparers who assist them.
- Abusive Roth IRAs. Promoters have urged taxpayers to transfer under-valued stock to Roth IRAs in order to circumvent the annual contribution limit and reduce taxes. The IRS cautions taxpayers to be wary of advisors who encourage them to shift under-valued property to Roth IRAs.
- 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.
- Disguised corporate ownership. This scam involves the use of anonymous entities to facilitate the underreporting of income, nonfiling of tax returns, listed transactions, money-laundering, financial crimes and possibly terrorist financing. The IRS is working with state authorities to identify these entities and to bring their owners into compliance.
- 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.
- Return preparer fraud. 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.
- American Indian employment credit. Another scam involves taxpayers who attempt to reduce their taxable income by claiming an American Indian employment or treaty credit. Although there is an Indian employment credit available for businesses, there is no provision for its use by employees. The IRS also cautions taxpayers that unscrupulous promoters have informed Native Americans that they are not subject to federal income taxation and, in some cases, used phishing techniques to solicit personal information.
- 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.
- Structured entity credits. In a newly identified scheme, promoters are setting up partnerships to own and sell state conservation easement credits, federal rehabilitation credits and other credits in order to generate losses. The IRS cautions taxpayers that investments in these entities are not valid, and the losses are not deductible.
- Abuse of charitable organizations and deductions. The IRS continues to observe the use of tax-exempt organizations to improperly shield income or assets from taxation.
- 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.
- Frivolous arguments. These include various arguments and claims regarding the constitutionality of federal tax laws. The IRS cautions that taxpayers have the right to contest their tax liabilities in court, but that no one has the right to disobey the law.
The easiest way to stay clear of the above tax scams is to use common sense and avoid letting greed get the better of you.
"Taxpayers shouldn't let their guard down," IRS Commissioner Mark W. Everson said. "Don't get taken by scam artists making outrageous promises. If you use a tax professional, pick someone who is reputable. Taxpayers should remember they are ultimately responsible for what is on their tax return even if some unscrupulous preparers have steered them in the wrong direction."
Taxpayers are encouraged to report suspected tax fraud activity to the IRS by using Form 3949-A, Information Referral. Form 3949-A is available for download from the IRS web site, or by mail by calling 1-800-829-3676.
- Related items:
- Taxpayers Making Costly Mistakes When Claiming Federal Telephone Excise Tax Refund
- Income Tax Filing Deadline Changed by IRS
- IRS Touts Program for Free Filing of Tax Returns
- IRS Begins Tax Season With Important Issues Unresolved
- IRS Officials Highlight Tax Return Changes For Individuals
- Congressional Panel Examines Business Tax Reform
- Rules Change for Hybrid Vehicle Tax Credit
- IRS Outlines Taxpayer Protections in Private Debt Collection Program
- IRS Outsources Some Debt Collection Activity
Added to the news on March 22, 2007.
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