IRS Issues Annual ‘Dirty Dozen’ List Of Tax Scams

by Leroy Baker, Tax-News.com, New York

02 March 2005

The Internal Revenue Service on Monday warned taxpayers to be on their guard against questionable tax schemes, as it issued its annual “Dirty Dozen” listing of the most notorious scams.

According to the IRS, this year’s Dirty Dozen list includes several new schemes that either manipulate laws governing charitable groups, abuse credit counselling services or rely on refuted arguments to claim tax exemptions.

Moreover, the agency has also reported a rising incidence of identity theft, and a spread of schemes using email, the internet and telephones, in addition to cases where perpetrators pose illegally as IRS officers.

“The Dirty Dozen is a reminder that tax scams can take many forms,” IRS Commissioner Mark W. Everson commented.

“Don’t be fooled by false promises peddled by scam artists. They’ll take your money and leave you with a hefty tax bill,” he added.

The updated Dirty Dozen list for 2005 includes:

Trust Misuse: Where unscrupulous promoters urge taxpayers to transfer assets into trusts and promise a reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes.

Frivolous Arguments: These can include claims that the Sixteenth Amendment concerning Congressional power to lay and collect income taxes was never ratified; that wages are not income; or that filing a return and paying taxes are merely voluntary.

Return Preparer Fraud: Where preparers derive financial gain by skimming a portion of their clients’ refunds and charge inflated fees for return preparation services.

Credit Counselling Agencies: Taxpayers are urged to be on the lookout for credit counselling organizations that claim they can fix credit ratings and push debt payment agreements. They may also charge high fees, monthly service charges or mandatory ‘contributions’ that may add to debt.

‘Claim of Right’ Doctrine: Where a taxpayer files a return and attempts to take a deduction equal to the entire amount of his or her wages. The promoter then advises the taxpayer to label the deduction as “a necessary expense for the production of income” or “compensation for personal services actually rendered.”

‘No Gain’ Deduction: Similar to ‘Claim of Right,’ filers attempt to eliminate their entire adjusted gross income (AGI) by deducting it on Schedule A.

Corporation Sole: Where participants apply for incorporation under the pretext of being a ‘bishop’ or ‘overseer’ of a one-person, fake religious organization or society with the idea that this entitles the individual to exemption from federal income taxes as a nonprofit, religious organization.

Identity Theft: Identity thieves have used stolen personal data to access financial accounts, run up charges on credit cards and apply for new loans. The IRS is aware of several identity theft scams involving taxes.

Abuse of Charitable Organizations and Deductions: The IRS has observed an increase in the use of tax-exempt organizations to improperly shield income or assets from taxation. This may occur 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.

Offshore Transactions: Where income is illegitimately hiden in offshore bank and brokerage accounts, or where offshore credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities and life insurance may be used to achieve the same purpose.

Zero Return: Where promoters instruct taxpayers to enter all zeros on their federal income tax filings. A similar scheme sees filers enter zero income, report their withholding and then write “nunc pro tunc” - Latin for “now for then” - on the return.

Employment Tax Evasion: These involve illegal schemes that instruct employers not to withhold federal income tax or other employment taxes from wages paid to their employees, based on an incorrect interpretation of Section 861 and other parts of the tax law and have been refuted in court.

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