Washington, DC (March 14, 2007)—Each year, the IRS releases a list of the “Dirty Dozen”—the top 12 tax scams that IRS criminal investigators and auditors have uncovered. Honest taxpayers beware: many of these scams are being perpetrated by unethical tax preparers who are trying to inflate refund requests (and thereby their own fees). Participation in these schemes can result in imprisonment, fines, and repayment of taxes owed with penalties and interest.
"It doesn't matter whether the taxpayer is aware of the scam or not. Once the taxpayer signs the return, he or she is responsible for all the information provided in it," says Cynthia Jeanguenat, EA, of Virginia Beach, VA. "An unethical or incompetent tax preparer can cost the taxpayer a lot of time, money and heartache once the IRS discovers the bogus return."
Topping this year’s list are telephone excise tax refund abuses. While some early filers may just be confused enough to request far more than the three-percent tax on long-distance and bundled service to which they are entitled, there is evidence that some professional tax preparers are helping their clients file apparently improper requests. Most taxpayers find that claiming the “safe harbor” amounts provided by the IRS is a less risky alternative.
Number two on the IRS list is abusive Roth IRAs. Moving under-valued common stock into a Roth IRA can be a method of circumventing the annual maximum contribution limit and allowing otherwise taxable income to go untaxed. “Phishing” addresses fraudulent emails taxpayers have received from organizations (sometimes claiming to be the IRS) that promise IRS refunds in exchange for personal information such as credit card and Social Security numbers.
Shell corporations are created to put one over on the IRS using disguised corporate ownership. Anonymous corporations can be used to facilitate a host of very illegal activities, ranging from underreporting of income to terrorist financing. An old favorite, zero wages, is still in play this year. This ploy involves filing a tax return that reports no income and no liability, even though there is income. Return preparer fraud, a special concern of the National Association of Enrolled Agents (NAEA), is the work of corrupt preparers who will sometimes skim a portion of their client’s refund and/or advise filing fraudulent claims.
New to the scam list this year is the American Indian employment credit. While there is an Indian Employment Credit for businesses that employ Native Americans or their spouses, employees may not use this to reduce their taxable income. Misuse of trusts occurs when taxpayers are urged to transfer assets into a trust in order to reduce income subject to taxation, deduct personal expenses, and reduce estate or gift taxes. Be warned—there are currently more than 150 active abusive trust investigations underway. Another newcomer this year is the structured entity credit scam. Be wary of partnerships set up to sell state conservation easement credits, federal rehabilitation credits and other credits: the goal of the investment is a deductible loss, but the investments aren’t valid and the losses aren’t deductible.
Just when you may have been thinking that this stuff would never apply to you, number ten on the list is abuse of charitable organizations and deductions. You know that 1988 Magnavox television that you donated to Purple Heart and were planning to claim is worth $200? Maybe you should reevaluate that claim. And don’t even think about applying for a refund or abatement of interest if you haven’t previously filed for that tax year. The IRS is onto the Form 843 tax abatement scam.
The twelfth and final Dirty Tax Trick of 2007 is frivolous arguments. These frivolous arguments can be anything from the contention that tax paying is voluntary to the claim that the IRS is an “illegal organization.” Now, who really thought they’d get away with that one?
The National Association of Enrolled Agents (NAEA) joins with the IRS in advising taxpayers to seek expert advice before subscribing to any scheme that offers instant wealth or exemption from taxes. Enrolled agents are tax professionals licensed by the US Department of the Treasury to represent taxpayers before all administrative levels of the IRS for audits collections and appeals. Enrolled agents must undergo a background check, pass a stringent three-part examination and complete continuing professional education requirements to stay current on the constant changes to the Tax Code. Don’t risk winding up in deep trouble with the IRS. To find an enrolled agent in your area, go to www.naea.org and click on “Find an Enrolled Agent.”
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The National Association of Enrolled Agents (NAEA) is a non-profit membership organization comprised of tax specialists licensed by the US Department of the Treasury. NAEA members are dedicated to maintaining the highest professional standards and to increasing the integrity of the tax administration system.