Tax Edge

The Internal Revenue Service on April 13, 2009, issued its 2009 "dirty dozen" list of tax scams, including schemes to hide income offshore, report exaggerated values for in-kind charitable contributions, and file false claims for refunds. Tax schemes are illegal and can lead to problems for both the scam artist and the taxpayer who risk significant penalties, interest and possible criminal prosecution.

"Taxpayers should be wary of scams to avoid paying taxes that seem too good to be true, especially during these challenging economic times," IRS Commissioner Doug Shulman said. "There is no secret trick that can eliminate a person's tax obligations. People should be wary of anyone peddling any of these scams."

Taxpayers are urged by the IRS to be alert to scams and avoid these common evasion schemes:

1. Phishing. Internet-based scam artists try to trick unsuspecting victims into revealing personal or financial information by sending e-mail that appears to come from the IRS. They use the information to steal the victim's identity, access bank accounts, run up credit card charges or apply for loans in the victim's name.

The IRS never initiates unsolicited e-mail contact with taxpayers about their tax issues, so don't fall for this trick. Taxpayers who receive unsolicited e-mails that claim to be from the IRS can forward the message to phishing@irs.gov. Further instructions are available at IRS.gov.

2. Hiding Income Offshore. Taxpayers often try to evade U.S. income tax by hiding income in offshore banks, brokerage accounts or through other entities. The IRS aggressively pursues persons who promote and taxpayers who participate in evasive offshore transactions. The IRS encourages voluntary disclosure of offshore accounts and taxable income earned through them. Other such evasion techniques include using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans. Be careful not to be drawn into such schemes as a means of hiding taxable income. The price could be very high.

3. Filing False or Misleading Forms. The IRS is seeing scam artists file false or misleading returns to claim refunds that they are not entitled to. Frivolous information returns claiming false withholding credits are used to legitimize erroneous refund claims.

4. Abuse of Charitable Organizations and Deductions. The IRS continues to observe the misuse of tax-exempt organizations - taxpayers using donation arrangements to improperly shield income or assets from taxation and attempting to maintain some form of control over donated assets. The IRS also continues to investigate various schemes involving in-kind donations where donations are highly overvalued. There can be heavy penalties for inaccurate appraisals, and there are new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions.

5. Return Preparer Fraud. Dishonest return preparers can cause many headaches for taxpayers who fall victim to their ploys. They attract new clients by promising large refunds and derive financial gain by skimming a portion of their clients' refunds and charging inflated fees for return preparation services. Taxpayers should choose their tax preparer carefully. As the saying goes, if it sounds too good to be true, it probably is. No matter who prepares the return, the taxpayer is ultimately responsible for its accuracy.

6. Frivolous Arguments. Promoters of frivolous schemes encourage people to make unreasonable and unfounded claims to avoid paying the taxes they owe. The IRS has a list of legal positions deemed to be frivolous that taxpayers should stay away from. Taxpayers who file a tax return based on a frivolous legal position are subject to a $5,000 penalty.

7. False Claims for Refund and Requests for Abatement. This scam involves a request for abatement of previously assessed tax using Form 843, Claim for Refund and Request for Abatement. Many individuals who try this have not previously filed tax returns. The tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program.

8. Abusive Retirement Plans. The IRS continues to uncover abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to IRAs. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into IRAs or companies owned by their IRAs at less than fair market value to circumvent annual contribution limits.

9. Disguised Corporate Ownership. Some taxpayers form corporations and other entities in certain states for the primary purpose of disguising the ownership of a business or financial activity. Such entities can be used to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes, and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance.

10. Phony Wage Reports. Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a "corrected" Form 1099 is used as a way to improperly reduce taxable income to zero. Taxpayers should resist any temptation to participate in any of the variations of this scheme.

11. Misuse of Trusts. For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are many legitimate, valid uses of trusts in tax and estate planning, some promoted transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the promised tax benefits and are being used primarily as a means to avoid income tax liability and hide assets from creditors, including the IRS.

12. Fuel Tax Credit Scams. The IRS is receiving claims for the fuel tax credit that are unreasonable. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim, potentially subjecting those who improperly claim the credit to a $5,000 penalty.

How to Report Suspected Tax Fraud Activity. If you witness suspected tax fraud, you can report it to the IRS using Form 3949-A, Information Referral, which is available for download from the IRS Web site at IRS.gov. 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.

Posted April 27, 2009.