12 Tax Scams You May Encounter This Year
By Becky Schmitz, EA,
Have you ever noticed how con artists
never take time off? They are constantly on the
lookout for ways to either get away with something
or create havoc in people’s lives. And where
better than in the income tax arena? Because fraudsters
use tax situations to hook individuals, they often
manage to trick people into believing they are complying
with tax laws, when in fact these lawbreakers are
Would you know what to look for to avoid an abusive
tax scheme? Are you aware of the tax scams that
scam artists utilize on a daily basis? For example,
if someone suggested that income tax is unconstitutional,
would you believe it? Hopefully, you would not,
because it isn’t true. And for that reason,
each year the IRS reveals the newest scams known
as the Dirty Dozen, which try to manipulate laws.
So taxpayers beware! The Dirty Dozen reminds us
that tax scams take many forms. To avoid getting
caught up in any one of these tax schemes, it is
imperative to stay alert to any scheme that can
seriously mess up your life and your finances.
This year, the “Dirty Dozen” includes
1. Zero Wages: This is a fairly new taxpayer scam
where the taxpayer attaches an incorrect form known
as Form 4852 (Substitute Form W-2) or a corrected
1099 that shows zero income or little income. It
probably includes a statement indicating a rebuttal
of information that was previously submitted to
the IRS. Beware anyone that encourages you to declare
2. Form 843 Tax Abatement: This is also a new scam
in which filers use IRS forms to claim their tax
bills have been wrongly inflated. By misinterpreting
the law, a taxpayer will wrongly try to get a refund
of previous years’ taxes. Many using this
scam have not previously filed tax returns.
3. Phishing: One of the more common tax scams these
days is occurring on the Internet. Known as ‘Phishing,’
it is plainly an attempt at identify theft. The
unsuspecting person receives an e-mail claiming
to be from the IRS but it’s actually linked
to a fake IRS website meant to solicit a taxpayer’s
personal information, such as Social Security numbers.
The con artist then uses the information to file
for a fraudulent refund. If you receive an e-mail
claiming to be from the IRS but you are suspicious,
call 1-800-829-1040 to report it.
4. Zero Return: Fraudulent promoters instruct taxpayers
to enter all zeros on their federal income tax filings.
Naturally, returns with all zeros are not valid.
If a preparer tells you to enter all zeros on your
federal tax return, report him or her immediately.
5. Trust Misuse: The IRS has become very aware of
Trust Misuse and is cracking down on the practice.
Unscrupulous tax scheme promoters urge taxpayers
to use offshore trusts to hide assets. Taxpayers
should be very cautious about Trust Misuse and seek
the advice of a trusted professional before entering
into a trust. If anyone encourages you to transfer
your assets into a trust to reduce your amount of
income subject to tax, you should be cautious. Several
promoters and their clients have been prosecuted
for this abuse.
6. Frivolous Arguments: Under this scam, various
constitutional arguments claim that filing and paying
taxes is voluntary. The fraudulent promoter will
allege that the Sixteenth Amendment concerning Congressional
power to lay and collect income taxes was never
ratified, implying that the IRS lacks authority
to collect taxes. This is absolutely untrue.
7. Return Preparer Fraud: If it sounds too good
to be true, it usually is. Return Preparer Fraud
usually constitutes preparing and filing false income
tax returns by preparers who inflate personal or
business expenses, make false deductions, include
excessive exemptions, and apply credits that are
not allowed. Taxpayers are responsible for accurate
tax returns, so be aware of tax return preparers
who promise big refunds. Make sure the company or
preparer you are working with is credible.
8. Credit Counseling Agencies: Reputable credit
counseling agencies can advise you in regard to
managing money and debts, but taxpayers should use
caution when soliciting the help of credit counseling
organizations. They may claim to fix credit ratings
but agencies that push debt payment agreements or
charge high amounts for their services could potentially
add to existing debt. The IRS Tax Exempt and Government
Entities Division, is currently in the process of
revoking the tax-exempt status of abusive agencies.
9. Abuse of Charitable Organizations and Deductions:
The IRS has observed increased use of tax exempt
organizations that improperly shield income or assets
from taxation. In this scam, a taxpayer may try
to move assets or income to a tax-exempt organization,
but maintains control over the income or assets.
10. Offshore Transactions: The IRS aggressively
pursues those who try to avoid US taxes by illegally
hiding income in offshore banks and brokerage accounts
or uses offshore credit cards, wire transfers, foreign
trusts, and employee leasing schemes to hide money.
The Internal Revenue Service has beefed up the money
it will spend in the next four years to investigate
11. Employment Tax Evasion: Some scam artists encourage
employers not to withhold federal income tax or
other income taxes. This is based on an incorrect
interpretation of the related tax code and is repeatedly
proven false in court.
12. No Gain Deduction: Under this scheme, some tax
filers try to eliminate their entire adjusted gross
income by deducting it on Schedule A with the words
“No Gain Realized.” This deduction has
no basis in law, so if you are confronted with this,
take heed. It won’t fly with the IRS.
The IRS routinely pursues and shuts down promoters
of these scams and is currently investigating high
wealth individuals and their associates. It is hoping
to boost government coffers by $615 million over
the next four years. In fact, the IRS recently announced
that it would spend $272.8 million over next four
years investigating and prosecuting under Operation
Wickenby, which looks into alleged fraud involving
the use of offshore entities. If you think you’ve
been a victim of tax fraud, you may call the IRS
at 1-800-829-0433 to learn more. The Internal Revenue
Service employees are looking out for the best interest
of the government.
(Becky Schmitz, owner of Centsable Accounting, has
recently been named the 2006 Top Practitioner from
The American Society of the Tax Problem Solvers.