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IRS issues new ‘dirty dozen’ list of attempted tax scams

Denver Business JournalOn the Money
From the March 2, 2007 print edition

“Taxes are what we pay for civilized society,” said U.S. Supreme Court Justice Oliver Wendell Holmes Jr.

But President Calvin Coolidge said, “Collecting more taxes than is absolutely necessary is legalized robbery.”

Somewhere between civilization and theft lies our obligation to Washington, D.C.

While it’s good business to minimize expenses (including taxes), wandering into illegal areas is never a wise choice. Remember, “Ignorantia juris non excusat.” That’s a fun phrase meaning, “Ignorance of the law is no excuse.”

Each February, the Internal Revenue Service publishes its “Dirty Dozen” list. The list contains the most blatant tax-related scams affecting American taxpayers.

This year’s collection reveals five new swindles. At the top of the list are fraudulent refunds being claimed in connection with the special Telephone Excise Tax Refund.

Other new abuses include cheats relating to Roth IRAs, the American Indian Employment Credit, domestic shell corporations and structured entities.

Taxpayers should remember they are ultimately responsible for what is on their tax return even if some unscrupulous preparers have steered them in the wrong direction,” IRS Commissioner Mark Everson says in a news release.

Here’s the latest list of common schemes.

  1. Telephone excise tax refund abuses: Requesting a refund of the entire amount of their phone bills, rather than just the 3 percent tax on long-distance and bundled service to which they are entitled.
  2. Abusive Roth IRAs: Shifting undervalued property to Roth Individual Retirement Arrangements (IRAs), circumventing the annual maximum contribution limit and allowing otherwise taxable income to go untaxed.
  3. Phishing: Internet-based criminals pose as representatives of the IRS, and send out fictitious e-mail correspondence in an attempt to trick consumers into disclosing private information. A typical e-mail notifies a taxpayer of an outstanding refund and urges the taxpayer to click on a hyperlink to visit an official-looking Web site.The IRS doesn’t use e-mail to initiate contact with taxpayers. Call 1-800-829-1040 to confirm any contact from the IRS.
  4. Disguised corporate ownership: Domestic shell corporations and other entities are being formed and operated in certain states for the purpose of disguising the ownership of the business or financial activity.
  5. Zero wages: A Form 4852 (Substitute Form W-2) or a “corrected” Form 1099, showing zero or little income, is submitted with a federal tax return, including a statement rebutting wages and taxes reported by the payer to the IRS.
  6. Return preparer fraud: Promises of large refunds by preparers. Any promise beyond an accurate and truthful return is fiction.
  7. American Indian employment credit: There is an Indian Employment Credit available for businesses that employ Native Americans. However, there is no provision for its use by employees. This provision of the tax code is also frequently contained in “phishing” swindles.
  8. Trust misuse: Not all trusts deliver the promised tax benefits. Currently, more than 150 active abusive trust investigations are in progress, and 49 injunctions have been obtained against promoters since 2001.
  9. Structured entity credits: A newly identified scheme is partnerships created to own and sell state “conservation easement credits.” According to the IRS, this isn’t a “viable business purpose,” and the investments aren’t valid.
  10. Abuse of charitable organizations and deductions: Moving assets or income into a tax-exempt organization but maintaining control over the assets or income is not acceptable. Furthermore, contributing non-cash assets continues be an area of abuse and scrutiny.
  11. Form 843 tax abatement: Unscrupulous preparers construct a confusing and fictional Form 843. The telltale identifying phrase for the fraud is, “Failed to properly compute and/or calculate IRC Sec 83-Property Transferred in Connection with Performance of Service.” Although the form is real- and is available to taxpayers who, for example, have had too much employment, tax withheld-in these fraudulent instances, those asking for “abatement” haven’t even filed previous tax returns.
  12. Frivolous arguments: As always, creativity flourishes to the outlandish when making tax avoidance claims. For example: the 16th Amendment concerning congressional power to lay and collect income taxes was never ratified; wages aren’t 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.

All of these arguments are false and have been adjudicated by the courts.

Remember the old axiom, “If it sounds too good to be true, it probably is.” The IRS wants to help the public recognize and avoid abusive tax schemes, and offers an abundance of educational materials.

Participating in an illegal scheme to avoid paying taxes can result in imprisonment and fines, as well as the repayment of taxes owed with penalties and interest. For more information, visit www.irs.gov/compliance/.

If you’re feeling overwhelmed, here’s one final piece of encouragement. Even Albert Einstein said, “The hardest thing in the world to understand is the income tax.”

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