A dozen ways to save taxes — all of them illegal

On the Money
From the February 3, 2006 print edition

It’s tax preparation time. As the clock ticks inexorably toward April 17 (two extra days this year because the 15th is a Saturday), thoughts of big refunds are inescapable. Predictably, there are also other people who would like to skim some of your refund by providing tax “advice.” Some of that advice may be phony.

Here are a dozen popular ploys that could cost you money — or land you in jail.

1. Imaginary children. The earned-income credit offers lower-income workers a way to save on taxes — particularly if you’re supporting two or more children. Unscrupulous tax preparers sometimes “borrow” one client’s “extra” offspring and transfer them to another filer’s return to illegally manufacture this tax break.
2. Pretend you’re a church. In this swindle, con artists convince individuals to apply for incorporation (called a “Corporation Sole”) under false religious pretexts so they are entitled to exemption from federal income taxes as a nonprofit, religious organization. Con artists have been charging up to $1,000 or more per person to sell the details of this tax-avoidance scheme.
3. Someone steals you. Identity theft is the No. 1 consumer complaint, and the crime can easily escalate during tax season. The IRS is aware of several scams involving taxes or the IRS. In one, tax preparers allegedly used client information, such as Social Security numbers and financial data, to commit identity theft.
4. The lemming scam. “I don’t pay taxes. Why should you?” Con artists boast about how they don’t file or pay taxes. They’re happy to share their “secret” — for a fee. “Un-tax yourself for $49.95.” If you buy this con and accompanying how-to material, you’ll ultimately find yourself out a lot more money. You’ll hand over the price of the fake tax-saving secret and face civil and criminal tax penalties.
5. All I do at home is business. The home-based business must be legitimate. Don’t necessarily believe — or pay — promoters of work-at-home plans that purport to make all your personal expenses tax-deductible. Businesses must have a clear business purpose and profit motive to claim business expenses.
6. Form 2439 rip-off. People offering tax credits or refunds related to reparations for slavery have deceived thousands of African-Americans for years. There is no law that allows for any slavery-related tax breaks. Mention of Form 2439 (Notice to Shareholder of Undistributed Long-Term Capital Gains) is the warning sign.
7. Distrusting trusts. This tax season, abusive trust schemes are the No. 1 scam. Promoters increasingly urge taxpayers to transfer assets into trusts. Promises include bogus benefits such as reduction of income subject to tax, deductions for personal expenses paid by the trust and a decrease in gift or estate taxes.
8. Snake-oil return preparers. Unethical return preparers hoodwink customers by diverting a portion of the taxpayer’s refund for their own benefit. Tax return preparation shouldn’t be performed on commission.
9. Zero withholding. These swindles rely on an interpretation of tax law that wages are not a “source” of income and that the definition of “sources of income” doesn’t apply to individuals. If anyone brings up Section 861 of the tax code, walk away.
10. Wade in the water. Hiding income in offshore banks and brokerage accounts, or using offshore credit cards, wire transfers and foreign trusts isn’t a good idea. This scam was No. 1 during the 2003 tax season. It’s still near the top, but concentrated IRS efforts in this area (along with an amnesty program last year) yielded more than $170 million in taxes, interest and penalties associated with illegal offshore accounts.
11. “Claim of Right” doctrine. Under what con artists are calling the “claim of right,” perpetrators of this tax dodge assert that a taxpayer can deduct all of his or her wages as “a necessary expense for the production of income” or “compensation for personal services actually rendered.” The IRS says this scam is “based on a complete misinterpretation of the Internal Revenue Code and has no basis in law.” Try it, and you’ll hear from an auditor.
12. Fantasy zeros, imaginary time. Some filers enter zero income, but report their withholding and then write “nunc pro tunc” — Latin for “now for then” — on their return. It may as well be Greek, because the IRS still will come after you.

The Federal Trade Commission works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace, and to provide information to help consumers spot, stop and avoid them.

To file a complaint or to get free information on consumer issues, visit www.ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261.

The FTC enters Internet, tax preparation, telemarketing, identity theft and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the United States and abroad.

© C. Stephen Guyer for American City Business Journals Inc. All rights reserved.