The IRS’s Dirty Dozen: 12 Tax Schemes to Avoid

The IRS just released the twelve top scams to avoid this tax season. In the
hope
that it helps you save money and avoid grief, my translation of the IRS’s explanations follows. 

1. Phony phone refunds being claimed as part of the special Telephone Excise Tax Refund available to most taxpayers this year. The IRS says it’s "actively
   investigating" tax preparers who are preparing inflated refund
   requests. We may
   not like them, but the folks who work for the IRS are not jerks. I
   wouldn’t
   want my return to look out of line in this area.
2. Abusive Roth IRAs: Don’t bite
   if someone
   proposes a scheme where you shift under-valued property to Roth IRAs
   to save
   on taxes.
3. Phishing, a technique familiar to
   regular Creditbloggers, is used by identity thieves to acquire personal
   financial info from unsuspecting folks so that they can run up charges on
   stolen credit cards, or apply for loans in the names
   of those they’ve scammed. Sometimes pretending to be from the IRS
   itself, these
   crooks send
   out emails trying to trick consumers into disclosing private
   information. If you
   have any doubt about whether a contact from the IRS is authentic, call
   800-829-1040.
4.   Shell corporations are becoming active in
   certain
   states to disguise ownership, avoid paying taxes, and under-report
   profits. The
   various branches of government are working together on this. Here’s
   hoping … but
   really … is it so hard to find a way to do something legit?
5. Zero Wages: This scam is a little
   dizzying to
   me, probably because of all the bureaucratese it entails. Somehow,  a Form 4852 ("Substitute Form W-2") or a "corrected" Form 1099 is submitted that shows zero or little income.
   Sometimes,
   taxpayers are encouraged to rebut past wages and taxes, refer to the
   IRS Code
   sections 3401 and 3121, and include a reference to a fear of IRS
   retaliation
   for bureaucratic mistakes. Clear as mud, huh? Stay away!
6. Tax Preparer Fraud: Dishonest
   preparers can
   cause a lot of grief. They make money by skimming some of their
   clients’
   refunds and charging inflated fees. They promise huge refunds – from
   not only
   this year, but past years, too.  "If it
   sounds too good to be true, it probably is." Choose wisely, based on
   personal
   recommendations from people you trust.
7. American Indian Employment Credit:
   While there’s
   an Indian Employment Credit available for businesses that employ Native
   Americans or their spouses, there is no provision for its use by
   employees. So
   Native Americans, watch out for this scam – and also for the good old
   standby,
   where you’re told you aren’t subject to federal income taxation. The
   latest
   variation has gone online. (See the advice on phishing, above.)
8. Trust Misuse: While some trusts
   makes sense
   for tax and probate avoidance purposes, there are plenty of scammers
   out there
   promising to reduce income taxes and raise deductions — as well as cut
   estate
   taxes — if you sign on the dotted line right now. Not so fast!  Take the time to get plenty of expert advice before
   you set up a trust.
9. Structured Entity Credits: This one, newly identified by the IRS and
   crooked
   through and through, really burns me up! According to
   the IRS, scammers set up
   partnerships to own and sell "state conservation easement credits,
   federal
   rehabilitation credits and other credits. The
   purported
   credits are the only assets owned by the partnership and once the
   credits are
   fully used, an investor receives a K-1 indicating the initial
   investment is a
   total loss, which is then deducted on the investor’s individual tax
   return."
10. Abuse of Charitable Organizations and
    Deductions:
    The IRS keeps its eyes on the tempting practices of using tax-exempt organizations to "improperly shield income or assets from taxation." Don’t put an unrealistic price tag on what you donate, and don’t expect a non-profit to let you continue to control your gift. Finally, "the IRS
    is noticing the return of private tuition payments being disguised as charitable contributions to religious organizations." I’m not sure how this would work, but if you’re doing it, you better stop.
11. Form 843 Tax Abatement: This is
    another
    popular bureaucratese scam that, according to the IRS, "rests on faulty
    interpretation of the Internal Revenue Code." The filer asks for the
    abatement
    of previously assessed tax using Form 843. "Many using this scam have
    not
    previously filed tax returns and the tax they are trying to have abated
    has
    been assessed by the IRS through the Substitute for Return Program. 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 IRS Sec 83-Property Transferred in Connection with
    Performance of
    Service.’" I say stay away from Form 843!
12. Frivolous Arguments: Typical
    statements
    including:

•  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
•  Being
  required to file Form 1040 violates the Fifth Amendment right against
  self-incrimination and/or the Fourth Amendment right to privacy

Uncle Sam says doesn’t believe these or
other
similar claims. "These arguments are false and have been thrown out of
court.
While taxpayers have the right to contest their tax liabilities in
court, no
one has the right to disobey the law."

The best piece of tax advice that I
know comes
down from Judge Learned Hand: "There is
nothing sinister in so arranging one’s affairs as to keep taxes as low
as
possible …" To which I add this helpful reminder from an old hippie
friend of
mine: "Don’t
do the crime if you can’t do the time."

What
tax advice do you have to offer – to do or not to do?!