The Dirty Dozen
With all the sequels and remakes of popular movies currently on the market, it seemed appropriate to add one more to the growing list. No, you’re not about to experience a remake of the 1967 World War II drama starring such greats as Lee Marvin, Ernest Borgnine and others. That would take way too much digital paper and, besides, purchasing the copyright would be way too expensive. Instead, we’re going to talk about the Internal Revenue Service’s 2006 list of the twelve most troublesome tax scams, affectionately known as the Dirty Dozen. This list is the IRS’s way of helping taxpayers avoid scams that sound plausible, but will cost a ton if used.
Zero Wages. This new Dirty Dozen scam may sound a lot like how you feel when you get your paycheck, but it’s actually a way to use IRS Form 4852 (Substitute Form W-2) to attempt to avoid paying tax. Typically, Form 4852, or a "corrected" 1099, showing very little wages or other income is filed with a taxpayer’s return. There may be an explanation that cites "statutory language behind IRC 3401 and 3121" and/or a statement by the taxpayer that the employer refused to issue a corrected W-2 or 1099. If someone suggests you investigate this strategy to reduce or eliminate your tax bill - run!
Form 843 Tax Abatement. Also new to the Dirty Dozen is a scheme where the taxpayer requests abatement of a previously assessed tax using IRS Form 843. Typically, this scam is used by taxpayers who have not filed their returns and the IRS has prepared a substitute return for them based on W-2, 1099 and other information filed with the IRS. By filing Form 843, they ask for abatement of the tax often using a reason such as "Failed to properly compute and/or calculate IRC Sec 83 - Property Transferred in Connection with Performance of Service."
Phishing. No, the IRS is not particularly interested in what you do on the lake when the fish are biting. It is, however, extremely interested in helping you prevent identity theft. As used in connection with the IRS, crooks will pose as IRS representatives and send e-mails to consumers claiming the consumer has an outstanding refund. In order to get the refund, you are taken to an official-looking website where you enter certain personal information, including credit card number and social security number. Another form of the scam claims that the taxpayer is under audit and providing certain data will help avoid any audit problems.
Let’s make one thing perfectly clear - The IRS does not solicit social security numbers through e-mail contact. In the first place, they already know your social security number. In the second place, the IRS does not initiate any contact about taxpayer accounts through e-mail. If you have any concerns regarding the authenticity of an IRS contact, call 1-800-829-1040 to confirm it.
Zero return. In this scam, a promoter will advise you to file a return with all zeros. Often, this is done using an amended return in the hope the IRS will disregard the original return where wages and other income were reported.
Trust Misuse. This is an old scheme used by promoters that promises to make deductible personal expenses that are not otherwise deductible. While there may be some legitimate uses for trusts, this is not one of them and generally will land you in hot water. The IRS is aggressively pursuing schemes like this and you should never ever enter into a trust arrangement unless you first clear the specifics with a trusted financial advisor.
Frivolous Arguments. Despite numerous court rulings, including many United States Supreme Court rulings, there are promoters who would have you believe that our income tax system is unconstitutional, wages are not income, filing and paying taxes is purely voluntary or violates the Fifth Amendment to the U.S. Constitution. Given that the United States Supreme Court seems to think the United States Income Tax laws are constitutional, your best bet when presented with these claims is to (1) pick yourself up off the floor from laughing and (2) leave whoever is making the claim far behind in a cloud of dust.
Return Preparer Fraud. Believe it or not, there are some unscrupulous return preparers in this world. Luckily, this firm is not familiar with any of them. These people will make money by promising large refunds or make other claims that are "too good to be true," skim money off the top of any refund their victim may get and then go missing when it’s time to defend the return. Remember two things - (1) If it sounds too good to be true, it usually is and (2) regardless of whether you have been defrauded by a crooked preparer, you are still responsible for everything that goes on your tax return.
Credit Counseling Agencies. Though not specifically geared toward tax abatement, there are many credit counseling agencies that purport to "fix" your credit rating, impose high up-front fees, push debt payment plans and otherwise claim to help you with credit problems. Some of these agencies are for real, but caution is required before entering into any agreements. Investigate the agency because many are just scams. The IRS is actively working to revoke tax-exempt status of many agencies as they simply are not what they purport to be and eventually just rob from their customers.
Abuse of Charitable Organizations. There has been an increase in the use of tax-exempt organizations (or seemingly tax-exempt organizations) to shield income. Anytime you run across a scheme that allows you to transfer assets to an organization, but maintain control over the use and direction of the assets, don’t trust the paper the offer is written on. To be a bona-fide charitable gift, there must be an actual transfer and loss of control over the asset being gifted, along with a demonstrable benefit to the charitable organization that is supposedly receiving the donation.
Offshore Transactions. Hiding income or assets offshore to avoid payment of taxes is still illegal. Putting income in unreported foreign bank and brokerage accounts, using offshore credit cards, wire transfers, foreign trusts and other offshore transactions may be illegal if done for the purpose of avoiding taxes. The qualifier "may" is used in connection with the legality of such arrangements because there are sometimes valid purposes for foreign transactions; however, you should use extreme caution in entering into any such arrangements.
Employment Tax Evasion. If someone tells you that you are not required to withhold federal income or employment taxes (FICA and Medicare) from your employees’ paychecks, or that you are otherwise not required to pay such taxes, be very careful. While there may be some very minor instances based on specialized circumstances, the claim is generally not true. Failure to pay the taxes when due can and will result in penalties and possibly payment of not only the employer’s share of employment taxes, but also the tax that should have been withheld from the employee.
"No Gain" Deduction. Some folks have figured out that they can claim a miscellaneous itemized deduction for the full amount of their Adjusted Gross Income (AGI) and thereby avoid paying any tax at all. This would be a wonderful strategy, except it is flat out illegal. Generally, they use the words "No Gain Realized" and refer to court documents to support their claim. Don’t buy this tactic as it will only cause you substantial interest, penalties and possibly jail time in the long run.
Nobody likes giving the government money they have worked so hard to earn, but the plain simple fact is taxable income breeds income taxes. There are many legal ways to reduce tax liabilities, if you qualify, but none of the preceding scams qualify as legal. If you receive a solicitation or offer that sounds too good to be true and purports to eliminate or reduce your tax burden, give us a call. Better you should learn the truth from a professional than from a crook.
Have a great June and to all you June brides - congratulations.