Paying taxes is a fact of life, it always has been, and it
always will be. For years the IRS has warned taxpayers
about tax fraud, tax schemes, and plain old individual
dishonesty. In many cases the dishonesty can result in
stiff financial penalties and the fraud can result in jail.
But still, this warning continues to evade some taxpayers.
So be for warned. The IRS wants you to know many tax scams
and schemes still exist and is heavily promoted as legal
by con artist, and individual taxpayer dishonesty is not
an option.
As per the IRS, they look shady. They
lurk in the shadows. They try to entice you with promises
of bigger refunds, audit-proof
tax breaks or sure ways to beat the IRS. But the only sure
thing about them is that they can cause you trouble … a
lot of trouble.
Defend yourself by reviewing the IRS
update of the Dirty Dozen – 12 schemes and scams
prowling for victims during tax season.
Check out what IRS agents are finding
in their criminal investigations of crooked tax preparers – and
their tips for avoiding these characters.
The IRS urges people to avoid these common schemes:
Offshore Transactions. Some people use offshore transactions
to avoid paying United States income tax. Use of an offshore
credit card, trust or other arrangement to hide or underreport
income or to claim false deductions on a federal tax return
is illegal.
Through April 15, the IRS is offering people with improper
offshore financial arrangements a chance to make things right.
Eligible taxpayers who step forward will not face civil fraud
and information return penalties. A taxpayer involved in
these schemes who does not come forward now, however, will
be subject to payment of taxes, interest, penalties and potential
criminal prosecution.
People interested in participating in the program, called
the Offshore Voluntary Compliance Initiative, can contact
the IRS by calling 215-516-3537 (not toll-free).
Identity Theft. Identity thieves use
someone’s personal
data to steal his or her financial accounts, run up charges
on the victim’s existing credit cards, apply for new
loans, credit cards, services or benefits in the victim’s
name and even file fraudulent tax returns.
The IRS is aware of at least two recent
identity theft scams involving taxes or the IRS. In one,
tax preparers allegedly
used information, such as Social Security numbers and financial
information, from their clients’ tax returns to commit
identity theft. In another, fraudsters sent bank customers
fictitious bank correspondence and IRS forms in an attempt
to trick them into disclosing their personal and banking
data.
For taxpayers, it pays to be choosy about disclosing personal
and financial information. And the IRS encourages taxpayers
to carefully select a reputable tax professional.
Phony Tax Payment Checks. In this scheme, con artists sell
fictitious financial instruments that look like checks to
pay a tax liability, mortgage and other debts. The con artists
may also counsel their clients to use a phony check to overpay
their taxes so they can receive a refund from the IRS for
the overpayment. The false checks, called sight drafts, are
worthless and have no financial value. It is illegal to use
these sight drafts to pay a tax liability or other debts.
African-Americans Get a Special Tax Refund. Thousands of
African-Americans have been misled by people offering to
file for tax credits or refunds related to reparations for
slavery. There is no such provision in the tax law. Some
unscrupulous promoters have encouraged clients to pay them
to prepare a claim for this refund. But the claims are a
waste of money. Promoters of reparations tax schemes have
been convicted and imprisoned. And taxpayers could face a
$500 penalty for filing such claims if they do not withdraw
the claim.
In early 2002, the slavery reparations scam ranked as the
No. 1 scheme on the Dirty Dozen list. Following a sweeping
public outreach campaign and assistance from members of the
Congressional Black Caucus and other organizations, the number
of reparation scam claims fell sharply. Tens of thousands
of claims were received in 2001, but the claims fell to less
than 50 per week in 2002.
No Taxes Withheld From Wages. Illegal schemes are being
promoted that instruct employers not to withhold federal
income tax or employment taxes from wages paid to their employees.
These schemes are based on an incorrect interpretation of
tax law and have been refuted in court. A recent flurry of
court actions has been taken against promoters of these schemes.
Taxpayers who have concerns about their employer and employment
taxes can get help by calling the IRS at 1-800-829-1040.
Improper Home-Based Business. This
scheme purports to offer tax “relief” but in
reality is illegal tax avoidance. The promoters of this
scheme claim that individual taxpayers
can deduct most, or all, of their personal expenses as business
expenses by setting up a bogus home-based business. But the
tax code firmly establishes that a clear business purpose
and profit motive must exist in order to generate and claim
allowable business expenses.
Pay the Tax, Then Get the Prize. The
caller says you’ve
won a prize, and all you have to do to get it is to pay the
income tax due. Don't believe it. Someone who really wins
a prize may need to make an estimated tax payment to cover
the taxes that will be due at the end of the year. But the
payment goes to the IRS – not the caller. Whether the
prize is cash, a car or a trip, a legitimate prize giver
generally sends both the winner and the IRS a Form 1099 showing
the total prize value that should be reported on the winner’s
tax return.
Frivolous Arguments. Frivolous arguments
are false arguments that are unsupported by law.When a
scheme promoter says “I
don’t pay taxes – why should you” or urges
you to “untax yourself for $49.95,” beware. These
scams are as old as snake oil, but people continue to be
taken in. And now they’re on the Internet. The ads
may say that paying taxes is “voluntary,” but
that’s just plain wrong. The U.S. courts have continuously
rejected this and other frivolous arguments. Unfortunately,
hundreds of people across the country have paid for the “secret” of
not paying taxes or have bought “untax packages.” Then
they find out that following the advice contained in them
can result in civil and/or criminal penalties. Numerous sellers
of the bogus schemes have been convicted on criminal tax
charges.
Social Security Tax Scheme. Taxpayers
shouldn’t fall
victim to a scam offering refunds of the Social Security
taxes they have paid during their lifetimes. The scam works
by the victim paying a "paperwork" fee of $100,
plus a percentage of any refund received, to file a refund
claim with the IRS. This hoax fleeces the victims for the
up-front fee. The law does not allow such a refund of Social
Security taxes paid. The IRS processing centers are alert
to this hoax and have been stopping the false claims.
"I Can Get You a Big Refund ...for a Fee!" Refund
scheme operators may approach someone wanting to "borrow" their
Social Security number or give him or her a phony W-2 so
it appears that the person qualifies for a big refund. They
may promise to split the refund with that person, but the
IRS catches most of these false refund claims before they
go out. And when one does go out, the participant usually
ends up paying back the refund along with stiff penalties
and interest. Two lessons to remember: 1) Anyone who promises
someone a bigger refund without knowing their tax situation
could be misleading them, and 2) Never sign a tax return
without looking it over to make sure it’s honest and
correct.
Share/Borrow EITC Dependents. Unscrupulous
tax preparers "share" one
client's qualifying children with another client in order
to allow both clients to claim the Earned Income Tax Credit.
For example, one client may have four children but only needs
to list two to get the maximum EITC. The preparer will list
two children on the first client’s return and the other
two on another client’s tax return. The preparer and
the client "selling" the dependents split a fee.
The IRS prosecutes the preparers of such fraudulent claims,
and participating taxpayers could be subject to civil penalties.
IRS “Agent” Comes To Your House To Collect.
First, do not let anyone into your home unless they identify
themselves to your satisfaction. IRS special agents, field
auditors and collection officers carry picture IDs and will
normally try to contact you before they visit. If you think
the person on your doorstep is an impostor, lock your door
and call the local police. To report IRS impostors, call
the Treasury Inspector General’s Hotline at 1-800-366-4484.
Beyond the “Dirty Dozen,” the IRS sees many more
tax schemes. Some examples include home-based business scams,
disabled access credit for pay phones and a variety of improper
abusive trusts.
“The best advice for taxpayers is to remember the
concept of ‘buyer beware,’” Wenzel said. “Think
carefully before paying for services or signing important
documents. And don’t be fooled by outrageous promises.
If something sounds too good to be true, it probably is.”
Individual tax information, www.irs.gov
Business Tax Information, www.irs.gov
Lois Center-Shabazz is the founder
of MsFinancialSavvy.com and author of the 3-time award-winning
personal finance book, Let's Get Financial Savvy! ISBN #0971979502.
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