Newspaper Page Text
7A
March 10, 2005
IRS announces the 2005 Dirty Dozen
ATTANTA - The Internal
Revenue Service today
unveiled its annual listing of
notorious tax scams, the “Dirty
Dozen,” reminding taxpayers
to be wary of scf;cmcs that
promise to eliminate taxes or
otherwise sound too good to be
true.
The “Dirty Dozen” tor 2005
includes several new scams that
either manipulate laws govern
ing ch.trita{:lc groups, abuse
credit counseling services or
rely on refuted arguments o
claim tax exemptions. The
agency also sees the continuing
spread of identity thett schemes
preying on people through e
mail, tfic Internet or the phone,
sometimes with con artists pos
ing as representatives of the
IRS.
“The Dirty Dozen is a
reminder that tax scams can
take many forms,” IRS Com
missioner Mark W. Everson
said. “Dont be fooled by talse
promises peddled by scam
artists. Theyll take your money
and leave vou with a hefty tax
bill.”
Involvement with tax
schemes can lead to imprnison
ment and tines. The IRS rou
unely pursues and shuts down
promotens of these scams. But
taxpayers should also remem
ber that anyone pulled into
these schemes can face repay
ment of taxes plus interest and
penalties.
Persons who suspect tax
traud can call the IRS at 1-800-
829-0433.
The Dirty Dozen
The IRS urges people to avord
these common schemes:
Trust Misuse. Unscrupulous
promoters for years have urged
taxpayers to transfer assets into
trusts. They promise reduction
of income subject to rtax,
deductions for personal
expenses and reduged estate or
gift taxes. However, some trusts
do not deliver the promised tax
benefits, and the IRS 1s actively
examining these arrangements.
More than two dozen injunc
tions have been obrained
against promoters since 2001,
and numerous promoters and
their dlients have been prose
cuted. As with other arrange
ments, taxpayers should seek
the advice of a trusted profes
sional before entering into a
trust.
Frivolous Arguments. Pro
moters have been known to
make the following outlandish
claims: that the Sixteenth
Amendment concerning con
ressional power to lay and col-
FCCY INCOME taxes was Never rat
ified; that wages are not
income; that filing a return and
paying taxes are merely volun
tary; and that being required to
file Form 1040 violates the
Fifth Amendment right against
self-incrimination or the
Fourth Amendment right to
privacy. Dont believe these or
other similar daims. Such argu
ments are false and have been
thrown out of court. While tax
payers have the right to contest
their tax liabilities in court, no
one has the right to disobey the
Jaw.
Return Preparer Fraud. Dis
honest return preparers can
cause many hmdac{:a for tax
payers who fall victim to their
ploys. Such preparers derive
financial gain by skimming a
portion o?ztuheir clients’ refunds
and charging inflated fees for
return preparation services.
They attract new clients by
promising large refunds. Tax
payers should choose carefully
when hiring a tax preparer. As
the saying goes, if it sounds too
good tonEe true, it probably is.
No matter who prepares the
return, the taxpayer is ultimate
ly responsible for its accuracy.
Since 2002, the courts have
issued injunctions ordering
dozens of individuals to cease
reparing returns, and the
f)q)am'ncnt of Justice has filed
complaints against dozens of
others, which are pending in
court.
Credit Counseling Agencies.
Taxpayers should be careful
with credit counseling organi
zations that claim they can fix
credit ratings, push debt pay
ment agreements or charge
high fees, monthly service
charges or mandatory “contri
butions” that may add to debr.
The IRS Tax Exempt and Gov
ernment Entues Division has
made auditing credit counsel-
INg Organizations a priority
because some of these tax
exempt organizations, which
are intended w 0 provide educa
ton to low-income customers
with debt problems, are charg
ing debrors large fees, whritl‘c
providing little or no counsel-
Ing,
“Claim of Right” Doctrine.
In this scheme, a taxpayer files a
return and attempts 1o take a
deduction equal to the entire
amount of his or her wages.
The promoter advises the tax
payer to label the deduction as
“a necessary expense for the
production ot income” or
“compensation for personal
services actually rendered.”
This so-called deduction 1s
based on a misinterpretation of
the Internal Revenue Code and
has no basis in law.
“No Gain™ Deduction. Sim
tlar to “Clum of Right,” filers
attempt o climinate their
entire adjusted gross income
(AGD by deducting it on
Schedule A. The filer lists his or
her AGI under the Schedule A
section labeled “Orther Miscel
lancous Deductions” and
attaches a statement o the
return, referring to court docu
ments and including the words
“No Gain Realized.”
Corporation Sole. Since Sep
tember 2004, the Department
of Justice has obtained six
INJUNCUONS ZAINST PromMoters
ot this scheme and tiled com
plaints against 11 others. Par
ticipants apply for incorpora
tion under the pretext of being
a “bishop™ or “overseer” of a
one-person, phony religious
Organization or society with the
idc.l Ih.lt Ihi\ L‘millcs Ihc illdi~
vidual to exemption trom fed
eral income taxes as a nonprot
it, religious organization.
When used as intended, Cor
p()r.llinn \nlc starutes CIMNL‘
religious leaders to separate
themselves legally from the
control and u\\'ncr\hip of
church assets. But the rules
have been twisted at seminars
where taxpayers are charged
tees of SI,OOO or more and
incorrectly told that Corpora
tion Sole laws provide a 'chzll"
way to escape paying federal
income taxes, child support
and other personal debts.
Identity Theft. It pays to be
choosy when it comes to dis
closing personal information.
Idenuty 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 cus
tomers fictitious correspon
dence and IRS forms in an
attempt to trick them into dis
closing 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 scam
mers 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
shoulf 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
all 1-800-829-1040 to con
firm it.
Abuse of Charitable Organi
zavons and Deductions. The
IRS has observed an increase in
the use of ax-exempt organiza
tions to improperly shield
income or assets from taxation.
This can occur, for example,
when a taxpayer moves assets or
INCOME 1o a tax-exempt sup
porting organization or donor
advised fund but maintains
control over the assets or
income, thereby nl)t;lining atax
deduction without transterring
a commensurate benefit to
charity. A “contribution” of a
historic facade easement to a
tax-exempt conservation
organization is another exam
ple. In many cases, local his
toric preservation laws already
prohibit alteration of the
homes facade, making the con
tributed casement superfluous.
Even it the facade could be
altered, the deduction claimed
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AUGUSTA FOCUS
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 con
tinue to try to avoid U.S. taxes
by illegally hiding income in
offshore bank and brokerage
accounts or using offshore
credit cards, wire transfers, for
:’ifn trusts, employee leasing
schemes, private annuities or
life insurance to do so. The
IRS, along with the tax agen
cies of U.S. states and posses
sions, continues to aggressively
pursue taxpayers anfil})mmm—
ers 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 withhold
ing and then write “nunc pro
tunc’— lLatin 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 fed
cmr 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 per
sons ordering them to stop
promoting the scheme.
Employer participants can also
be flc]d responsible for back
payments of employment
taxes, plus penalties and inter
est. It is worth noting that
employees who have nothing
withheld from their wages are
still responsible for payment‘of
their personal taxes. s
Orher Scams Still Lingeririg
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 scafns
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
tme. ’