And this year’s tax scam winners are…
1. Telephone Excise Tax Refund Abuses: Taxpayers request a refund of the entire amount of their phone bills, rather than just the 30 percent tax on long-distance and bundled service to which they are entitled.
2. Abusive Roth IRAs: Taxpayers should be wary of advisers who encourage them to shift undervalued property to Roth IRAs. In one scam variation, a promoter has the taxpayer move undervalued common stock into a Roth IRA, circumventing the annual maximum contribution limit and allowing otherwise taxable income to go untaxed.
3. 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.
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. Once formed, these anonymous entities can be, and are being, used to facilitate underreporting of income.
5. Zero Wages: In this scam, a corrected Form 1099 showing zero or little income is submitted with a federal tax return.
6. Return Preparer Fraud: Dishonest return preparers can cause many headaches for taxpayers who fall victim to their schemes. As the old saying goes, “If it sounds too good to be true, it probably is.”
7. American Indian Employment Credit: Taxpayers submit returns and claims reducing taxable income by substantial amounts citing an American Indian employment or treaty credit. Although there is an Indian Employment Credit available for businesses that employ Native Americans or their spouses, there is no provision for its use by employees.
8. Trust Misuse: There are currently more than 150 active abusive trust investigations underway and 49 injunctions have been obtained against promoters since 2001.
9. Structured Entity Credits: Promoters of this newly identified scheme are setting up partnerships to own and sell state conservation easement credits, federal rehabilitation credits and other credits. The investments are not valid and the losses are not deductible.
10. Abuse of Charitable Organizations and Deductions: The IRS continues to observe the use of tax-exempt organizations to improperly shield income or assets from taxation.
11. Form 843 Tax Abatement: This scam involves the filer requesting abatement of previously assessed tax using Form 843.
12. 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. Don’t believe these or other similar claims.
Michael Rozbruch is a Certified Tax Resolution Specialist, a member of the American Society of IRS Problem Solvers and a Maryland CPA.
For more information, please call 818-774-1813 to obtain a free subscription to his newsletter titled The IRS Times & Inquirer.