Don’t Fall Prey to Tax Scams

Everyone must pay taxes. After all, it costs a lot of money to pay for the services provided to each citizen by our governmental entities. Services such as police, ambulance, fire, roads, bridges, parks, health, welfare, representation, diplomacy and defense.

Every citizen is also entitled to minimize his or her tax burden by taking legal deductions and adjustments. But those who are willing to go to extremes to avoid tax can fall prey to con artists who will fleece them and leave them subject to fines and jail time for tax fraud.

The IRS recently released warnings about the following major tax scams:

Return Preparer Fraud: Dishonest return preparers attract new clients by promising large refunds. Such preparers derive financial gain by skimming a portion of their clients' refunds and charging inflated fees. Taxpayers should choose carefully when hiring a tax preparer. Remember, no matter who prepares the return, the taxpayer is ultimately responsible for its accuracy.

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 do this with amended returns, hoping the IRS will disregard the original return in which they reported wages and other income.

Trust Misuse: Unscrupulous promoters urge taxpayers to transfer assets into trusts as a means for reducing taxes. But some trusts don't deliver the promised benefits. More than 200 active investigations are under way, and three dozen injunctions have been obtained against promoters since 2001. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust.

"IRS Has No Right!": Tax scam promoters try to convince taxpayers of outlandish theories, such as these: The Sixteenth Amendment concerning congressional power to levy 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. Don't believe these claims.

Credit Counseling Agencies: Taxpayers should be careful with credit counseling organizations that push aggressive debt repayment plans, claim they can fix credit ratings, or impose high setup fees or monthly service charges that may add to existing debt.

Abuse of Charitable Organizations: This one usually entails a taxpayer "moving" assets or income to a tax-exempt organization and claiming a deduction but never actually relinquishing control over the assets or income. In another version, the taxpayer "contributes" a historic-facade easement to a tax-exempt conservation organization.

Offshore Transactions: Despite a crackdown by the IRS and state tax agencies, individuals still try to avoid U.S. taxes by illegally hiding income in offshore banks and brokerage accounts or using offshore credit cards, wire transfers, foreign trusts, employee leasing, annuities or life insurance.

Employment Tax Evasion: These schemes instruct employers not to withhold federal 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. Employer participants also can be held responsible for back payments of employment taxes, plus penalties and interest. Employees who have nothing withheld from their wages are still responsible for paying their personal taxes.

"No Gain" Deduction: This scam convinces filers to deduct their entire adjusted gross income (AGI) 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 certain court documents and includes the words "No Gain Realized."

Zero Wages: 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. The taxpayer may include a statement indicating the taxpayer is rebutting information submitted to the IRS by the payer. An explanation on the Form 4852 may cite "statutory language behind IRC 3401 and 3121" or may include some reference to the paying company refusing to issue a corrected Form W-2 for fear of IRS retaliation.

Form 843 Tax Abatement: This scam rests on faulty interpretation of the Internal Revenue Code. It involves the filer requesting abatement of previously assessed tax using Form 843. Many using this scam have not previously filed tax returns and the tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program. The filer uses the Form 843 to list reasons for the request.

Phishing: This is a technique used by identity thieves to acquire personal financial data to gain access to the financial accounts of unsuspecting consumers, run up charges on their credit cards or apply for new loans in their names. Often through the Internet, criminals pose as representatives of a financial institution or the IRS and send out fictitious e-mail correspondence in an attempt to trick consumers into disclosing private information. If you're not sure a contact from the IRS is authentic, call 1-800-829-1040.

Suspected tax fraud can be reported to the IRS using IRS Form 3949-A, Information Referral. Download it from the IRS Web site (IRS.gov) or call 1-800-829-3676 to have it mailed to you. 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. The person also may be entitled to a reward.

Always remember - if it sounds too good to be true, it probably is.