Your Taxes: The American dirty dozen

Here is information on the 12 most egregious tax schemes and scams it would be wise to avoid.

taxes good 88 (photo credit: )
taxes good 88
(photo credit: )
The US Internal Revenue Service (IRS) recently published a notice (IR 2008-041) entitled: "Phishing Scams, Frivolous Arguments Top the 2008 'Dirty Dozen' Tax Scams." This gives details of the 12 most egregious tax schemes and scams it would be wise to avoid - not only in the United States. Topping this year's list of scams is phishing, which encompasses numerous Internet-based ploys to steal financial information from taxpayers. "Taxpayers should be wary of scams and promises to avoid paying taxes that seem too good to be true," IRS Acting Commissioner Linda Stiff said. "There is no secret formula that can eliminate a person's tax obligations." Tax schemes can lead to problems for both scam artists and taxpayers, according to the IRS. Tax return preparers and promoters also risk significant penalties, interest and possible criminal prosecution. The IRS urges taxpayers to avoid these common schemes: 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. Some scam e-mails falsely claim to come from the IRS. (Some claim to come from banks in Israel or even El Al, the airline.) The IRS never uses e-mail to contact taxpayers about their tax issues. Taxpayers who receive an unsolicited e-mail that claims to be from the IRS can forward the message to a special electronic mailbox, [email protected], using instructions contained in an article entitled: "How to Protect Yourself from Suspicious E-Mails or Phishing Schemes." The only official IRS Web site is located at Scams related to the economic stimulus payment Some scam artists are trying to trick individuals into revealing personal financial information that can be used to access their financial accounts by making promises relating to the economic stimulus payment, often called a "rebate." To obtain the payment, eligible individuals in most cases will not have to do anything more than file a 2007 federal tax return. But some criminals posing as IRS representatives are trying to trick taxpayers into revealing their personal financial information by falsely telling them they must provide information to get a payment. The only real way to get a stimulus payment from the IRS is to file a 2007 US tax return. Frivolous arguments Promoters of some frivolous schemes encourage people to make unreasonable and unfounded claims to avoid paying the taxes they owe. Taxpayers who file a tax return or make a submission based on one of these positions on the list are subject to a $5,000 penalty. The most recent update of the list of frivolous positions includes: misinterpretation of the Ninth Amendment to the US Constitution regarding objections to military spending, erroneous claims that taxes are owed only by persons with a fiduciary relationship to the US, a nonexistent "Mariner's Tax Deduction" related to invalid deductions for meals and the misuse of the fuel tax credit (see below). Fuel tax-credit scams Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for a fuel tax-credit in the US. But some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Hiding income offshore Individuals continue to try to avoid paying US (and other) 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 that do not meet requirements of the Internal Revenue Code. Abusive retirement plans The IRS continues to uncover abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to Roth IRAs. Zero wages Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a "corrected" Form 1099 is used as a way to improperly reduce taxable income to zero. False claims for refund and requests for abatement 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 have not previously filed tax returns. 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. Always use experienced qualified and reputable professionals in each country. Disguised corporate ownership Some people are going as far as forming domestic shell corporations in certain US states for the purpose of disguising the ownership of a business or financial activity. Once formed, these anonymous entities are sometimes 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 the owners of these entities into compliance. 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. Abuse of charitable organizations and 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 an upturn in instances where taxpayers try to disguise private tuition payments as contributions to charitable or religious organizations. How to report suspected tax fraud activity Suspected tax fraud can be reported to the IRS using IRS Form 3949-A, Information Referral. Form 3949-A is available for download from the IRS Web site at The completed form or a letter detailing the alleged fraudulent activity should be addressed to the Internal Revenue Service, Fresno, CA 93888. The person filing the report is not required to self-identify, although it is helpful to do so. The identity of the person filing the report can be kept confidential. Whistle-blowers also could provide allegations of fraud to the IRS and may be eligible for a reward by filing Form 211, Application for Award for Original Information, and following the procedures outlined in Notice 2008-4. As always, consult experienced tax advisors in each country at an early stage in specific cases. [email protected] Leon Harris is an international tax partner at Ernst & Young Israel.