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IRS Announces “Dirty Dozen” Tax Scams for 2006
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IR-2006-25, Feb. 7, 2006
WASHINGTON — The Internal Revenue Service
today issued the 2006 “Dirty Dozen”––its
latest annual tally of some of the most
notorious tax scams––along with an alert to
taxpayers this filing season to watch out
for schemes that promise to reduce or
eliminate taxes.
Two new schemes have worked their way onto
the list in 2006. In recent months IRS
personnel have noted the emergence of the
two scams––“zero wages” and “Form 843 tax
abatement”–– in which filers use IRS forms
to claim that their tax bills have been
wrongly inflated.
Also high on the list in 2006 is “phishing,”
a favorite ploy of identity thieves. Over
the past few years, the IRS has observed
criminals working through the Internet,
posing even as representatives of the IRS
itself, with the goal of tricking
unsuspecting taxpayers into revealing
private information that can be used to
steal from their financial accounts.
Several of the usual suspects from last year
remain on the list. The IRS, for example,
continues to see schemes designed to exploit
charitable organizations. Some taxpayers,
meanwhile, still use frivolous arguments to
claim they do not owe taxes, despite the
fact such reasoning has been thrown out of
court time and again.
“When it comes to taxes, everyone has to pay
their fair share,” IRS Commissioner Mark W.
Everson said. “I urge taxpayers not to be
taken in by hucksters who promise to lower
or eliminate taxes. Getting caught up in the
Dirty Dozen or similar schemes can lead to
big headaches.”
Namely, involvement with tax schemes can
lead to imprisonment and fines. The IRS
pursues and shuts down promoters of these
and numerous other scams. Anyone pulled into
these schemes can also face repayment of
taxes plus interest and penalties.
The IRS urges people to avoid these common
schemes:
1. Zero Wages. In this
scam, new to the Dirty Dozen, a 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. The
Form 4852 or 1099 is usually attached to a
“Zero Return.” (See number four below.)
2. Form 843 Tax Abatement.
This scam, also new to the Dirty Dozen,
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. Often, one of the reasons is:
"Failed to properly compute and/or calculate
IRC Sec 83––Property Transferred in
Connection with Performance of Service."
3. Phishing. Phishing is a
technique used by identity thieves to
acquire personal financial data in order 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. These 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. Sometimes scammers pose as the
IRS itself. In recent months, some taxpayers
have received e-mails that appear to come
from the IRS. A typical e-mail notifies a
taxpayer of an outstanding refund and urges
the taxpayer to click on a hyperlink and
visit an official-looking Web site. The Web
site then solicits a social security and
credit card number. In a variation of this
scheme, criminals have used e-mail to
announce to unsuspecting taxpayers they are
“under audit” and could make things right by
divulging selected private financial
information. Taxpayers should take note: The
IRS does not use e-mail to initiate contact
with taxpayers about issues related to their
accounts. If a taxpayer has any doubt
whether a contact from the IRS is authentic,
the taxpayer should call 1-800-829-1040 to
confirm it.
4. 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 also do
this with amended returns in the hope the
IRS will disregard the original return in
which they reported wages and other income.
5. Trust Misuse. 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,
and the IRS is actively examining these
arrangements. There are currently more than
200 active investigations underway 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.
6. 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. These
arguments are false and have been thrown out
of court. While taxpayers have the right to
contest their tax liabilities in court, no
one has the right to disobey the law.
7. Return Preparer Fraud.
Dishonest return preparers can cause many
headaches for taxpayers who fall victim to
their schemes. Such preparers derive
financial gain by skimming a portion of
their clients’ refunds and charging inflated
fees for return preparation services. They
attract new clients by promising large
refunds. Taxpayers should choose carefully
when hiring a tax preparer. As the old
saying goes, “If it sounds too good to be
true, it probably is.” And remember, no
matter who prepares the return, the taxpayer
is ultimately responsible for its accuracy.
Since 2002, the courts have issued
injunctions ordering dozens of individuals
to cease preparing returns, and the
Department of Justice has filed complaints
against dozens of others. During fiscal year
2005, more than 110 tax return preparers
were convicted of tax crimes.
8. Credit Counseling Agencies.
Taxpayers should be careful with credit
counseling organizations that claim they can
fix credit ratings, push debt payment plans
or impose high set-up fees or monthly
service charges that may add to existing
debt. The IRS Tax Exempt and Government
Entities Division is in the process of
revoking the tax-exempt status of numerous
credit counseling organizations that
operated under the guise of educating
financially distressed consumers with debt
problems while charging debtors large fees
and providing little or no counseling.
9. Abuse of Charitable Organizations
and Deductions. The IRS has
observed increased use of tax-exempt
organizations to improperly shield income or
assets from taxation. This can occur, for
example, when a taxpayer moves assets or
income to a tax-exempt supporting
organization or donor-advised fund but
maintains control over the assets or income,
thereby obtaining a tax deduction without
transferring a commensurate benefit to
charity. A “contribution” of a historic
facade easement to a tax-exempt conservation
organization is another example. In many
cases, local historic preservation laws
already prohibit alteration of the home’s
facade, making the contributed easement
superfluous. Even if the facade could be
altered, the deduction claimed for the
easement contribution may far exceed the
easement’s impact on the value of the
property.
10. Offshore Transactions.
Despite a crackdown by the IRS and state tax
agencies, individuals continue to try to
avoid U.S. taxes by illegally hiding income
in offshore bank and brokerage accounts or
using offshore credit cards, wire transfers,
foreign trusts, employee leasing schemes,
private annuities or life insurance to do
so. The IRS and the tax agencies of U.S.
states and possessions continue to
aggressively pursue taxpayers and promoters
involved in such abusive transactions.
During fiscal 2005, 68 individuals were
convicted on charges of promotion and use of
abusive tax schemes designed to evade taxes.
11. Employment Tax Evasion.
The IRS has seen a number of illegal schemes
that 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 and has been refuted in
court. Lately, the IRS has seen an increase
in activity in the area of “double-dip”
parking and medical reimbursement issues. In
recent years, the courts have issued
injunctions against more than a dozen
persons ordering them to stop promoting the
scheme. During fiscal 2005, more than 50
individuals were sentenced to an average of
30 months in prison for employment tax
evasion. Employer participants can also be
held responsible for back payments of
employment taxes, plus penalties and
interest. It is worth noting that employees
who have nothing withheld from their wages
are still responsible for payment of their
personal taxes.
12. “No Gain” Deduction.
Filers attempt to eliminate their entire
adjusted gross income (AGI) by deducting it
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 court documents and includes the
words “No Gain Realized.”
Two Fall off the List
Two noteworthy scams have dropped off the
“Dirty Dozen” this year: “claim of right”
and “corporation sole.” IRS personnel have
noticed less activity in these scams over
the past year following court cases against
a number of promoters.
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 IRS.gov,
or through the U.S. Mail by calling
1-800-829-3676. The completed form or a
letter detailing the alleged fraudulent
activity should be addressed to the Internal
Revenue Service, Fresno, CA 93888. The
mailing should include specific information
about who is being reported, the activity
being reported, how the activity became
known, when the alleged violation took
place, the amount of money involved and any
other information that might be helpful in
an investigation. 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 may also be
entitled to a reward. |
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