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Thursday, February 09, 2006

“Dirty Dozen” Tax Scams for 2006

The IRS recently announced its 2006 "Dirty Dozen" list of tax scams. Since this is the season, many people will be persuaded to try an easy way out of paying taxes. Here are a few of the items on the IRS list:
Zero Wages - in this one, a taxpayer attaches to his or her return either a Form 4852 (Substitute Form W-2) or a "corrected"” Form 1099 that shows zero or little wages or other income. This might also involve the taxpayer including a statement indicating the taxpayer is rebutting information submitted to the IRS by the payer.

Form 843 Tax Abatement -
This scam, also new to the Dirty Dozen, rests on faulty interpretation of the Internal Revenue Code. It involves the filer requesting abatement of previously assessed tax using Form 843.

Phishing - Internet-based criminals pose as representatives of a financial institution and send out fictitious e-mail correspondence in an attempt to trick consumers into disclosing private information. Sometimes scammers pose as the IRS itself. In recent months, some taxpayers have received e-mails that appear to come from the IRS. A typical e-mail notifies a taxpayer of an outstanding refund and urges the taxpayer to click on a hyperlink and visit an official-looking Web site. The Web site then solicits a social security and credit card number. REMEMBER - never give out your private information over the internet (or a phone) unless you're initiated it and you know who you're giving it to.

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. They often also do this with amended returns in the hope the IRS will disregard the original return in which they reported wages and other income.

Trust Misuse - 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, and the IRS is actively examining these arrangements, and currently has more than 200 active investigations underway and three dozen injunctions against promoters since 2001.

Frivolous Arguments - Promoters have been known to make the following outlandish claims: the Sixteenth Amendment concerning congressional power to lay and collect income taxes was never ratified; wages are not income; filing a return and paying taxes are merely voluntary; and being required to file Form 1040 violates the Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy. These arguments are false and have been thrown out of court.

Return Preparer Fraud - Dishonest return preparers can cause many headaches for taxpayers who fall victim to their schemes. 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.

“No Gain” Deduction - 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 that refers to court documents and includes the words "“No Gain Realized."
There are others - read the whole list here.

A few things to keep in mind:
  • If it sounds too good to be true, it probably is
  • Consult a reputable tax preparer (one you trust) before you try any "non-standard" approach to your taxes.
Hey, paying taxes surely stinks. But not nearly as much as going to jail or paying the taxes you would have anyway along with huge penalties and interest.

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