Twelve Tax Scams To Avoid

As April 15 approaches and you realize how much you pay the federal government each year, you may be inclined to listen to someone who promises to reduce or eliminate your tax bill, but beware.

The Internal Revenue Service recently issued a nationwide alert to taxpayers warning them not to fall victim to twelve of the most frequent tax avoidance scams. “These ‘Dirty Dozen’ schemes surface each year as tax filing season begins. Con artists shamelessly take advantage of people, charging fees for their illegal tax schemes,” former IRS Commissioner Charles O. Rossotti said.

Be on-guard for these scams:

African-Americans get a special tax refund. Promoters offer to prepare your return to claim a credit for reparations for slavery. There is no such credit. Promoters have been convicted and imprisoned for this scheme which has been circulating for years.

No taxes being withheld from your wages. Many of the tax avoidance scams are truly ridiculous. One such scheme instructs employers not to withhold federal income tax or employment taxes from wages paid to their employees. The theory is that “wages” are not “income,” and, therefore, are not taxable. The courts have little sympathy for these baseless claims and routinely impose jail sentences on taxpayers who cling to these theories.

“I don’t pay taxes, why should you?” Con artists may tell you that they don’t file or pay taxes and that they will reveal their secret for a fee. There is no secret. Some of these people are outright liars who actually do file returns and pay taxes. Those who don’t are committing tax fraud.

Pay the tax, then get the prize. Prizes are in fact taxable, however, the tax is paid to the IRS, not the prize giver. If you have won a legitimate prize, you should receive a Form 1099 the next January. The 1099 reports the income to the IRS and you must include the income on your return.

Untax yourself for $49.95 (or more). According to the IRS, “This one’s as old as snake oil, but people continue to be taken in. And now it’s on the Internet.” The promoters frequently claim that paying taxes is “voluntary.” Of course, this claim is false. Unfortunately, people continue to be taken in by this scam. Many times the IRS will not charge these people for several years. By then, the unpaid taxes, interest and penalties have multiplied and can impoverish the taxpayer and his or her family.

Social security tax scheme. Scam number six offers a taxpayer a refund of Social Security taxes. The promoter receives a “paperwork” fee plus a percentage of any refund received. It is not possible to claim a refund for social security taxes except in the unlikely circumstance that you paid more than the maximum tax in any one year. The IRS is aware of this hoax and will not process these claims. By the time the claim is rejected, however, the promoter has taken the fee and disappeared.

“I can get you a big refund … for a fee!” This scheme can take several forms, including issuing you a phony W-2 so it appears that you qualify for a big refund. The IRS catches most of these false refund claims before they go out because all W-2 forms must be filed with the IRS by the employer. The IRS advises you to remember that no one can honestly promise you a refund without knowing the details of your tax return. In addition, you should never sign a blank or false tax return.

Share/borrow EITC dependents. In order to claim the maximum Earned Income Tax Credit, a taxpayer must list two qualifying children. Dishonest tax preparers may list one taxpayer’s children on another taxpayer’s return. The preparer and the client “selling” the dependents split a fee. This scheme is fairly easy for the IRS to detect because its computers will detect if a child has been moved from one tax return to another. In addition, the IRS checks social security number against claims for assistance such as public aid. If a child’s social security number is associated with one taxpayer on a claim for benefits and with another taxpayer as a dependent on an income tax return, the IRS computers will deny the earned income tax credit.

IRS “agent” comes to your house to collect. All IRS special agents, field auditors, and collection officers carry picture identification. IRS employees will normally contact you before any visit. First, you will be informed by mail if your return has been selected for audit. Then you will be contacted by phone to schedule any necessary meetings. If you have any concerns, do not open your door and call the police.

“Put your money in a trust and never pay taxes again.” These schemes claim that “constitutional trusts,” “pure trusts” or trusts under some other name are separate from the taxpayer and are not required to pay income tax. Promoters may charge $5,000 to $70,000 for their “trust” package. First, if a taxpayer or his or her spouse can receive benefits from a trust, the trust is generally considered to be the same as the taxpayer for income tax purposes. This is true for United States trusts and foreign trusts. As a United States citizen, you are taxed on all of your income, regardless of where it is earned. Second, trusts are subject to income tax, generally at higher rates than individuals. These trust schemes have been aggressively marketed over the past several years, and the IRS is now aggressively pursuing the promoters of these scams. The IRS will also seize the promoters’ records which will lead the IRS directly to each person who has purchased a trust package.

Improper home-based business. The promoters of these schemes claim that individual taxpayers can deduct most, or all, of their personal expenses as business expenses by setting up a home-based “business” or by creating a corporation. Deductions are only allowed, however, for expenses actually incurred in engaging in a business with a profit motive.

Claim disabled access credit for pay phones. A con artists may attempt to sell you an expensive pay phone with a volume control, telling you that you can claim a $5,000 Disabled Access Credit on your tax. The Disabled Access Credit is limited to bona fide businesses that are coming into compliance with the Americans with Disabilities Act.

Remember, if the IRS determines that you have underpaid your tax liability, you will be responsible for the unpaid taxes and interest. You will also be responsible for penalties if your legal claims had no basis, and you could be sentenced to prison. If you want to reduce your income tax liability, work with legitimate tax professionals.

by Sarah Delano Pavlik

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