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June 2008 IRS Releases Its 2008 List of the Top 12 Tax Scams Technology advances and federal tax legislation provide the basis for some of the newcomers to the Dirty Dozen In the June 2005 issue of The Bottom Line, we first wrote about the IRS’s annual list of the top 12 types of tax scams. The 2008 edition of the IRS’s “Dirty Dozen,” issued in March, differs enough from past versions to warrant sharing it with you. Topping this year’s list of scams is phishing, which encompasses numerous Internet-based ploys to steal financial information from taxpayers, while one of the newcomers is a scheme discovered by IRS tax auditors that relates to unreasonable and/or excessive fuel tax credit claims. Without further ado, here is the 2008 IRS Dirty Dozen. 1. Phishing. “Phishing” is a tactic used by Internet-based thieves to trick unsuspecting victims into revealing personal information they can then use to access the victims’ financial accounts. These criminals use the information obtained to empty the victims’ bank accounts, run up credit card charges, and apply for loans or credit in the victims’ names. Phishing scams often take the form of an e-mail that appears to come from a legitimate source, such as the IRS. The IRS never uses e-mail to contact taxpayers about their tax issues. 2. Economic Stimulus Payments. By now, Scam #2 will probably have dropped in the ranking, as most of Uncle Sam’s payments to taxpayers pursuant to the Economic Stimulus Act will have been made. During March, April and May, scam artists were trying to trick individuals into revealing personal financial information that could be used to access their financial accounts, by making promises or issuing warnings relating to the economic stimulus payment. For instance, potential victims would be told by phone or e-mail that they were eligible for a rebate but had to provide a bank account number (or similar information) to get the payment. If they balked, the victims were told that they could not receive the rebate unless the information is provided. 3. Frivolous Arguments. Promoters of frivolous schemes encourage people to make unreasonable and unfounded claims to avoid paying the taxes they owe. The result to the taxpayer: a $5,000 penalty. The most recent update of the list of frivolous positions (see the complete list) includes:
4. Fuel Tax Credit Scams. Not surprisingly, the IRS is receiving unreasonable claims for the fuel tax credit. While some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit, some individuals are claiming the credit for nontaxable uses of fuel. Fraud involving the credit was recently added to the list of frivolous tax claims, potentially subjecting those who improperly claim the credit to a $5,000 penalty. 5. Hiding Income Offshore. Individuals continue to try to avoid paying federal taxes by illegally hiding income in offshore bank and brokerage accounts or using offshore debit cards, credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance plans. The IRS and state tax agencies continue to aggressively pursue taxpayers and promoters involved in such abusive transactions. (Please note that there are legitimate and legal offshore planning strategies, and taxpayers seeking to make proper use of those strategies should contact a reputable asset protection attorney for guidance.) 6. Abusive Retirement Plans. The IRS continues to uncover abuses in retirement plan arrangements, including transactions that taxpayers are using to avoid the limitations on contributions to Roth IRAs. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into Roth IRAs, or companies owned by their Roth IRAs, at less than fair market value. In one variation of the scheme, a promoter has the taxpayer move a highly appreciated asset into a Roth IRA at cost value, which is below the annual contribution limits, instead of the fair market value, which far exceeds the amount allowed. 7. Zero Wages. Filing a phony wage- or income-related information return to replace a legitimate information return has been employed as an illegal method to lower the amount of taxes owed. Workers trying to pull a fast one have been known to:
Taxpayers should resist any temptation to participate in any of the variations of this scheme. 8. False Refund Claims, Abatement Requests. This scam involves a request for abatement of previously assessed tax, using Form 843, “Claim for Refund and Request for Abatement.” Many individuals who try this approach have not previously filed tax returns, and the tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program. The filer uses Form 843 to list reasons for the request. A popular reason offered (without success) is “Failed to properly compute and/or calculate Section 83 Property Transferred in Connection with Performance of Service.” 9. Return Preparer Fraud. Dishonest tax return preparers can cause many problems for taxpayers who fall victim to their schemes. These scam artists make their money by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Some preparers promote the filing of fraudulent claims for refunds on items such as fuel tax credits to recover taxes paid in prior years. Taxpayers should choose carefully when hiring a tax preparer, especially one who promises something that seems too good to be true. 10. Disguised Corporate Ownership. Some people are going so far as to form domestic “shell” corporations in certain states for the purpose of disguising the ownership of a business or financial activity. Once formed, these anonymous entities can be used to facilitate underreporting of income, non-filing of tax returns, engaging in listed transactions, money laundering, financial crimes and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring their owners into compliance. 11. Misuse of Trusts. For years, unscrupulous promoters 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. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust. 12. Abuse of Charitable Deductions. The IRS continues to observe the misuse of tax-exempt organizations. Misuse includes arrangements to improperly shield income or assets from taxation, attempts by donors to maintain control over donated assets or income from donated property, and overvaluation of contributed property. In addition, IRS examiners are seeing greater frequency of instances in which taxpayers try to disguise private tuition payments as contributions to charitable or religious organizations. Closing Thought. Please note that, even if it isn’t included among the IRS’s Dirty Dozen, a tax scam is still a tax scam. Before you purchase $24 billion in marketable tax credits from a barrister in Zimbabwe for just $10,000 and your Social Security number, contact your Schmidt Westergard & Company tax professional. Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market. |