The Internal Revenue Service recently held an informational meeting in Washington, D.C., about tax scams and other fraudulent schemes that are often marketed to health professionals.
High-income individuals are natural targets for unscrupulous promoters of schemes that illegally shelter income. Falling prey to these schemes can result in huge tax penalties, interest charges, and civil and criminal penalties, including jail time.
As if such punishments weren't sufficient deterrence, the IRS makes sure that tax fraud cases get plenty of publicity, and professional licenses may be revoked in some cases.
The agency receives approximately 80 leads per month on suspicious tax scheme promotions and currently has about 1,000 under investigation. Following is the IRS list of the "Dirty Dozen" tax schemes.
Misuse of trusts
Promoters of abusive tax transactions may urge taxpayers to transfer assets into trusts, promising benefits such as reduction of income subject to tax, deductions for personal expenses paid by the trust and reduction of gift or estate tax.
Abusive trust arrangements will not produce the tax benefits advertised by their promoters. Before entering any trust, arrangements, taxpayers should seek the advice of a trusted tax professional.
"Claim of right" doctrine
In this emerging scheme, promoters advise taxpayers to take a deduction equal to the entire amount of their wages by labeling them as "a necessary expense for the production of income" or "compensation for person services actually rendered." These deductions are a misinterpretation of Internal Revenue Code.
This scheme claims that individuals can exempt income from federal taxes by declaring themselves a nonprofit, religious organization. The correct intention of this statute enables religious leaders to become incorporated as individuals to separate themselves legally from the control and ownership of church assets.
Promoters twist the rules and charge fees of $1,000 or more from people at seminars where they're mistakenly told they can escape federal income taxes, child support, and personal debt.
Using an offshore bank account, brokerage account, credit card, wire transfer, trust, offshore employee lease, or other arrangement to hide or underreport income or to claim false deductions on a federal tax return is illegal. This was the top scam for 2003, and the IRS is aggressively pursuing taxpayers and promoters in this area.
Employment tax evasion
Another illegal scheme instructs employers not to withhold federal income tax or other employment taxes from wages paid to employees. These schemes are based on an incorrect interpretation of Section 861 and other parts of tax law.
Criminal convictions for promoters and employer responsibility for back payments, plus penalties and interest, may result. Employees with no withholdings are still responsible for their income tax.
Return preparer fraud
Unscrupulous return preparers can derive financial gain by diverting a portion of the taxpayer's refund for their own benefit, charging inflated fees for the return preparation services, and increasing their clientele by advertising guaranteed larger refunds. Taxpayers need to be careful in choosing their preparers.
Americans with Disabilities Act scam
In another scheme, a promoter alleges that the purchase of equipment and services meets the strict criteria of the Disabled Access Credit created by the Americans with Disabilities Act. The unsuspecting business owner makes a minimal payment, and a nonrecourse note is signed. The promoter then provides insignificant services to complete the purchase agreement. An incorrect interpretation of the law and an overinflated value of the services rendered are the bases of this scam.
Special tax refund for blacks
Thousands of blacks have been misled by people offering to file for tax credits or refunds related to reparations for slavery. No such provision exists in the tax law. This was the top tax scam for 2002, and although such claims have fallen, the IRS is still seeing them.
Improper home-based business
Promoters of this scheme claim that taxpayers can deduct most, or all, of their personal expenses as business expenses by setting up a bogus home-based business. To legally make business expense claims, there must be a clear business purpose and profit motive.
These are false arguments that are unsupported by law. Ads claim that the promoters know the secret for never paying taxes again. Following the incorrect information in these "untax packages" can result in civil and/or criminal penalties.
The IRS is aware of several identity theft scams involving taxes or the IRS. Examples are individuals who have sent bank customers fictitious bank correspondence and IRS forms in an attempt to gain personal and banking data. In another scam, abusive tax preparers have used clients' Social Security numbers and other information to file false tax returns.
Share/borrow EITC dependents
Unscrupulous tax preparers "share" a client's qualifying children with another client to allow both clients to claim the Earned Income Tax Credit. In other words, 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 such fraudulent claims.
Reporting tax fraud
Individuals who suspect tax fraud can report it to the IRS at (800) 829-0433. Be wary of anyone offering to eliminate one's taxes. In the words of IRS Commissioner Mark W. Everson, "Don't be fooled by these outrageous claims. There is no secret way to escape paying taxes."