The Internal Revenue Service has issued its annually updated list of so-called 'Dirty Dozen' tax scams for 2006 along with an alert to taxpayers this filing season to watch out for schemes that promise to massively reduce or eliminate taxes.
Two new schemes have worked their way onto the list in 2006: “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, who steal personal information for financial gain.
Recent years have seen increasing numbers of 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, for example, schemes that seek to exploit charitable organizations, and the use of frivolous arguments to claim that no tax is owed.
“When it comes to taxes, everyone has to pay their fair share,” IRS Commissioner Mark W. Everson stated.
“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," he added.
The schemes on this year's Dirty Dozen list include:
1. Zero Wages. This is where 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.
2. Form 843 Tax Abatement. This involves the filer requesting abatement of previously assessed tax using Form 843. 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. 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.
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. The IRS warns that some trusts do not deliver the tax benefits promised by tax promoters. There are currently more than 200 active investigations underway and three dozen injunctions have been obtained against promoters since 2001.
6. Frivolous Arguments. Some promoters have used arguments such as that 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.
7. Return Preparer Fraud. This is where dishonest 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. 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. 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.
10. Offshore Transactions. The IRS and the tax agencies of U.S. states and possessions continue to aggressively pursue taxpayers and promoters involved in transaction to avoid U.S. taxes. 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. The IRS has seen an increase in activity in the area of “double-dip” parking and medical reimbursement issues.
12. “No Gain” Deduction. This is where 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 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.
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