IRS warns of common tax schemes

The IRS this tax season has alerted taxpayers to avoid falling victim to one of the most common tax scams and a variety of other schemes. In the new 2004 ranking, several new scams have reached the top of the consumer watch list, including abusive trusts and the “claim of right” doctrine.

In addition, the IRS has taken a new step this year and issued 10 new pieces of legal guidance involving scams in the “Dirty Dozen” and other tax schemes. The new guidance debunks the schemes and provides new legal details to help tax practitioners and taxpayers.

“At the IRS, we’re augmenting our enforcement resources to attack schemes and scams. While we’re actively targeting promoters, taxpayers themselves should be wary of anyone who promises to eliminate their taxes,” said IRS Commissioner Mark W. Everson.

The IRS urges people to avoid these common schemes, among others:

“Misuse of Trusts,” occurs when promoters of abusive tax transactions urge taxpayers to transfer assets into trusts. The promoters promise a variety of benefits, such as the reduction of income subject to tax, deductions for personal expenses paid by the trust and reduction of gift or estate taxes.

“Offshore Transactions,” are one scheme used to avoid paying U.S. taxes. Use of an offshore bank account, brokerage account, credit card, wire transfer, trust, offshore employee leasing or other arrangement to hide or underreport income or to claim false deductions on a federal tax return is illegal. A taxpayer involved in these schemes could be subject to payment of taxes, interest, penalties and potential criminal prosecution, the IRS said.

“Employment Tax Evasion,” is an illegal scheme by which employers don’t withhold federal income tax or other employment taxes from wages paid to their employees. Recent court cases have resulted in criminal convictions of promoters.. Employer participants could also be held responsible for back payments of employment taxes, plus penalties and interest.

“Return Preparer Fraud” occurs when unscrupulous return preparers 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.

In another tax scheme, African Americans are told they can receive a special tax refund related to reparations of slavery.

“Improper Home-Based Business” is a scheme by which promoters claim that individual taxpayers can deduct most, or all, of their personal expenses as business expenses by setting up a bogus home-based business.

“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 taxpayers to “untax” themselves, beware.

“Identity Theft” 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.

Another scheme occurs when 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.

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