If you’ve heard that paying taxes is voluntary, or that you can avoid taxes by hiding your money offshore, the IRS begs to differ.
With weeks to go until the April 15 filing deadline, the Internal Revenue Service is warning taxpayers against overly creative efforts to avoid taxation.
The IRS recently released its annual list of “Dirty Dozen” tax-related scams.
“Tax scams can take many forms,” IRS Commissioner Mark Everson said. “Don’t be fooled by false promises peddled by scam artists. They’ll take your money and leave you with a hefty tax bill.”
Theodore David, a Hackensack, N.J., tax attorney, said taxpayers who try these schemes “are willing to play the tax-lottery game,” betting that with the audit rate below 1 percent, the IRS won’t catch them.
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“A lot of taxpayers seem to have larceny in their hearts,” he said.
The Dirty Dozen:
Return preparer fraud. Some preparers charge big fees for preparing tax returns, promising they can get the taxpayer large refunds. But if they use illegal deductions, the taxpayer’s out of luck. “No matter who prepares the return, the taxpayer is ultimately responsible for its accuracy,” the IRS said.
“Claim of right” doctrine. In this scheme, taxpayers attempt to take a deduction equal to the entire amount of their wages. The promoter advises the taxpayer to label the deduction as “a necessary expense for the production of income” or “compensation for personal services actually rendered.” This deduction won’t fly.
“No gain” deduction. This is similar to “claim of right.” Filers attempt to eliminate their entire adjusted gross income by deducting it on Schedule A, with a statement attached that includes the words “no gain realized.”
“Religious” corporation. Participants apply for incorporation under the pretext of being a “bishop” or “overseer” of a one-person religious organization. They claim this exempts them from federal income taxes. No matter how spiritual you are, the IRS won’t accept this one. Since September 2004, the Department of Justice has obtained six injunctions against promoters of this scheme and filed complaints against 11 others.
Identity theft. In one case, con artists sent out fictitious IRS forms, hoping people would respond with their personal financial data. So make sure you have the real thing.
Abuse of charitable organizations and deductions. More taxpayers are using tax-exempt organizations to improperly shield income or assets from taxation. This can occur, for example, when a taxpayer claims a deduction for a contribution without actually giving up control of the money, the IRS said.
Offshore transactions. Some people try to avoid taxes by illegally hiding income in offshore accounts or using offshore credit cards, wire transfers or foreign trusts.
Zero return. Promoters tell taxpayers to enter all zeros on their federal income tax forms.
Employment tax evasion. Some promoters tell employers not to withhold federal income tax from their workers’ paychecks. In some cases, tax attorney David said, employers in a cash crunch skip paying employment taxes, rather than ignore the rent or utility bill. Their theory — usually correct — is that it will take longer for the IRS to catch up with them than for the landlord or the light company.
Trust misuse. Although trusts are a legitimate tool in estate planning, some promoters push bogus tax-saving trusts.
Frivolous arguments. Promoters claim the constitutional amendment allowing the collection of taxes was never ratified and that paying taxes is voluntary. “Such arguments are false and have been thrown out of court,” the IRS warned.
Credit-counseling organizations that charge high fees. Although this is not directly related to personal income-tax filings, the IRS is auditing credit-counseling groups because some charge high fees while providing little or no counseling.
Four old favorites have been removed from the Dirty Dozen this year: slavery reparations, fake home-based businesses, Earned Income Tax Credit shenanigans and scams related to the Americans with Disabilities Act. These schemes have become less common recently, the IRS said.