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IRS
Announces the 2005 Dirty Dozen
From
IRS Press Release IR-2005-19, Feb. 28, 2005
WASHINGTON
— The Internal Revenue Service today unveiled its annual listing
of notorious tax scams, the “Dirty Dozen,” reminding
taxpayers to be wary of schemes that promise to eliminate taxes
or otherwise sound too good to be true.
The
“Dirty Dozen” for 2005 includes several new scams that
either manipulate laws governing charitable groups, abuse credit
counseling services or rely on refuted arguments to claim tax exemptions.
The agency also sees the continuing spread of identity theft schemes
preying on people through e-mail, the Internet or the phone, sometimes
with con artists posing as representatives of the IRS.
“The
Dirty Dozen is a reminder that tax scams can take many forms,”
IRS Commissioner Mark W. Everson said. “Don’t be fooled
by false promises peddled by scam artists. They’ll take your
money and leave you with a hefty tax bill.”
Involvement
with tax schemes can lead to imprisonment and fines. The IRS routinely
pursues and shuts down promoters of these scams. But taxpayers should
also remember that anyone pulled into these schemes can face repayment
of taxes plus interest and penalties.
Persons
who suspect tax fraud can call the IRS at 1-800-829-0433.
The
Dirty Dozen
The IRS urges people to avoid these common schemes:
Trust
Misuse. Unscrupulous promoters for years have urged taxpayers
to transfer assets into trusts. They promise reduction of income
subject to tax, deductions for personal expenses and reduced estate
or gift taxes. However, some trusts do not deliver the promised
tax benefits, and the IRS is actively examining these arrangements.
More than two dozen injunctions have been obtained against promoters
since 2001, and numerous promoters and their clients have been prosecuted.
As with other arrangements, taxpayers should seek the advice of
a trusted professional before entering into a trust.
Frivolous Arguments. Promoters have been known
to make the following outlandish claims: that the Sixteenth Amendment
concerning congressional power to lay and collect income taxes was
never ratified; that wages are not income; that filing a return
and paying taxes are merely voluntary; and that being required to
file Form 1040 violates the Fifth Amendment right against self-incrimination
or the Fourth Amendment right to privacy. Don’t believe these
or other similar claims. Such arguments are false and have been
thrown out of court. While taxpayers have the right to contest their
tax liabilities in court, no one has the right to disobey the law.
Return Preparer Fraud. Dishonest return preparers
can cause many headaches for taxpayers who fall victim to their
ploys. Such preparers derive financial gain by skimming a portion
of their clients’ refunds and charging inflated fees for return
preparation services. They attract new clients by promising large
refunds. Taxpayers should choose carefully when hiring a tax preparer.
As the saying goes, if it sounds too good to be true, it probably
is. No matter who prepares the return, the taxpayer is ultimately
responsible for its accuracy. Since 2002, the courts have issued
injunctions ordering dozens of individuals to cease preparing returns,
and the Department of Justice has filed complaints against dozens
of others, which are pending in court.
Credit Counseling Agencies. Taxpayers should be
careful with credit counseling organizations that claim they can
fix credit ratings, push debt payment agreements or charge high
fees, monthly service charges or mandatory “contributions”
that may add to debt. The IRS Tax Exempt and Government Entities
Division has made auditing credit counseling organizations a priority
because some of these tax-exempt organizations, which are intended
to provide education to low-income customers with debt problems,
are charging debtors large fees, while providing little or no counseling.
"Claim of Right" Doctrine. In this scheme, a
taxpayer files a return and attempts to take a deduction equal to
the entire amount of his or her wages. The promoter advises the
taxpayer to label the deduction as “a necessary expense for
the production of income” or “compensation for personal
services actually rendered.” This so-called deduction is based
on a misinterpretation of the Internal Revenue Code and has no basis
in law.
“No Gain” Deduction. Similar to “Claim
of Right,” filers attempt to eliminate their entire adjusted
gross income (AGI) by deducting it on Schedule A. The filer lists
his or her AGI under the Schedule A section labeled “Other
Miscellaneous Deductions” and attaches a statement to the
return, referring to court documents and including the words “No
Gain Realized.”
Corporation Sole. Since September 2004, the Department
of Justice has obtained six injunctions against promoters of this
scheme and filed complaints against 11 others. Participants apply
for incorporation under the pretext of being a “bishop”
or “overseer” of a one-person, phony religious organization
or society with the idea that this entitles the individual to exemption
from federal income taxes as a nonprofit, religious organization.
When used as intended, Corporation Sole statutes enable religious
leaders to separate themselves legally from the control and ownership
of church assets. But the rules have been twisted at seminars where
taxpayers are charged fees of $1,000 or more and incorrectly told
that Corporation Sole laws provide a “legal” way to
escape paying federal income taxes, child support and other personal
debts.
Identity Theft. It pays to be choosy when it comes
to disclosing personal information. Identity thieves have used stolen
personal data to access financial accounts, run up charges on credit
cards and apply for new loans. The IRS is aware of several identity
theft scams involving taxes. In one case, fraudsters sent bank customers
fictitious correspondence and IRS forms in an attempt to trick them
into disclosing their personal financial data. In another, abusive
tax preparers used clients’ Social Security numbers and other
information to file false tax returns without the clients’
knowledge. Sometimes scammers pose as the IRS itself. Last year
the IRS shut down a scheme in which perpetrators used e-mail to
announce to unsuspecting taxpayers that they were “under audit”
and could set matters right by divulging sensitive financial information
on an official-looking Web site. Taxpayers should note the IRS does
not use e-mail to contact them about issues related to their accounts.
If taxpayers have any doubt whether a contact from the IRS is authentic,
they can call 1-800-829-1040 to confirm it.
Abuse of Charitable Organizations and Deductions. The IRS
has observed an increase in the use of tax-exempt organizations
to improperly shield income or assets from taxation. This can occur,
for example, when a taxpayer moves assets or income to a tax-exempt
supporting organization or donor-advised fund but maintains control
over the assets or income, thereby obtaining a tax deduction without
transferring a commensurate benefit to charity. A “contribution”
of a historic facade easement to a tax-exempt conservation organization
is another example. In many cases, local historic preservation laws
already prohibit alteration of the home’s facade, making the
contributed easement superfluous. Even if the facade could be altered,
the deduction claimed for the easement contribution may far exceed
the easement’s impact on the value of the property.
Offshore Transactions. Despite a crackdown on the
practice by the IRS and state tax agencies, individuals continue
to try to avoid U.S. taxes by illegally hiding income in offshore
bank and brokerage accounts or using offshore credit cards, wire
transfers, foreign trusts, employee leasing schemes, private annuities
or life insurance to do so. The IRS, along with the tax agencies
of U.S. states and possessions, continues to aggressively pursue
taxpayers and promoters involved in such abusive transactions.
Zero
Return. Promoters instruct taxpayers to enter all zeros
on their federal income tax filings. In a twist on this scheme,
filers enter zero income, report their withholding and then write
“nunc pro tunc”–– Latin for “now for
then”––on the return.
Employment Tax Evasion. The IRS has seen a number
of illegal schemes that instruct employers not to withhold federal
income tax or other employment taxes from wages paid to their employees.
Such advice is based on an incorrect interpretation of Section 861
and other parts of the tax law and has been refuted in court. Recent
cases have resulted in criminal convictions, and the courts have
issued injunctions against more than a dozen persons ordering them
to stop promoting the scheme. Employer participants can also be
held responsible for back payments of employment taxes, plus penalties
and interest. It is worth noting that employees who have nothing
withheld from their wages are still responsible for payment of their
personal taxes.
Other Scams Still Lingering
The
IRS removed four scams from the Dirty Dozen this year: slavery reparations,
improper home-based businesses, the Americans with Disabilities
Act and EITC dependent sharing. The agency has noticed declines
in activity in some of these schemes. But taxpayers should remain
wary because the IRS has seen old scams resurface or evolve.
Moreover,
the IRS reminds taxpayers to be vigilant about cons that may not
be on the Dirty Dozen list. New tax scams or schemes routinely pop
up, especially around tax time.
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