Rick Norris
JD, CPA
Business Management and Consulting
IRS Dirty Dozen
Forensic Accounting & Fraud detection
Measuring Your Business' Health
Integrated Scorecard Engineering
Please fill in your email address to receive your free newsletter
IRS Updates the ‘Dirty Dozen’ for 2004: Agency Warns of New Scams
IR-2004-26, March 1, 2004
WASHINGTON — In an update of an annual consumer alert, the Internal Revenue Service urged taxpayers to avoid falling victim to one of the “Dirty Dozen” tax scams and a variety of other schemes. In the new 2004 ranking, several new scams have reached the top of the consumer watch list, including abusive trusts and the “claim of right” doctrine.
In addition, the IRS has taken a new step this year and issued 10 new pieces of legal guidance involving scams in the “Dirty Dozen” and other tax schemes. The new guidance debunks the schemes and provides new legal details to help tax practitioners and taxpayers.
"At the IRS, we're augmenting our enforcement resources to attack schemes and scams. While we're actively targeting promoters, taxpayers themselves should be wary of anyone who promises to eliminate their taxes," said IRS Commissioner Mark W. Everson. "Don't be fooled by these outrageous claims. There is no secret way to escape paying taxes."
The IRS and other federal agencies are aggressively pursuing and successfully prosecuting promoters of these schemes and many of their clients for fraud and tax evasion. Participation in these schemes can result in imprisonment, fines and repayment of taxes owed with interest and penalties. Even innocent taxpayers involved in these schemes can face a staggering amount of back interest and penalties.
Taxpayers who suspect tax fraud can report it to the IRS at 1-800-829-0433.
The IRS urges people to avoid these common schemes:
- Misuse of Trusts. Promoters of abusive tax transactions are increasingly urging taxpayers to transfer assets into trusts. The promoters promise a variety of benefits, such as the reduction of income subject to tax, deductions for personal expenses paid by the trust and reduction of gift or estate taxes. Taxpayers should be aware that abusive trust arrangements will not produce the tax benefits advertised by their promoters and that the IRS is actively examining these types of trust arrangements. More than a dozen injunctions have been obtained against promoters, and numerous promoters and their clients have been criminally prosecuted. Before entering any trust arrangements, taxpayers should seek the advice of a trusted tax professional.
-
"Claim of Right" Doctrine.
In this emerging scheme, people file returns and attempt to take a deduction
equal to the entire amount of their wages. The promoters advise them to label
the deduction as “a necessary expense for the production of income” or
“compensation for personal services actually rendered”. The deduction is based
on a complete misinterpretation of the Internal Revenue Code and has no basis
in law.
-
Corporation Sole.
The idea is that the arrangement entitles the individual to exemption from
federal income taxes as a nonprofit, religious organization as described in
tax laws. When used as intended, Corporation Sole statutes enable religious
leaders — typically bishops or parsons — to become incorporated as individuals
as a way of separating themselves legally from the control and ownership of
church assets. But the rules have been twisted at seminars where promoters
charge fees of up to $1,000 or more per person. Would-be participants are
mistakenly told that Corporation Sole laws provide a “legal” way to escape
paying federal income taxes, child support and other personal debts.
-
Offshore Transactions.
Some people use offshore transactions to avoid paying United States taxes. Use
of an offshore bank account, brokerage account, credit card, wire transfer,
trust, offshore employee leasing or other arrangement to hide or underreport
income or to claim false deductions on a federal tax return is illegal. A
taxpayer involved in these schemes could be subject to payment of taxes,
interest, penalties and potential criminal prosecution. This was the top scam
in the 2003 “Dirty Dozen.” A special program last year has yielded more than
$170 million in taxes, interest and penalties, and the IRS and the states
continue to aggressively pursue taxpayers and promoters in this area.
-
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. These schemes are based on an incorrect interpretation of “Section
861” and other parts of the tax law and have been refuted in court. Recent
court cases have resulted in criminal convictions of promoters. Employer
participants could also be held responsible for back payments of employment
taxes, plus penalties and interest. Employees who have no withholdings are
still responsible for payment of their personal taxes.
-
Return Preparer Fraud.
Unscrupulous return preparers can cause a lot of problems for taxpayers who
use their services. Abusive return preparers derive financial gain by
diverting a portion of the taxpayer’s refund for their own benefit, charging
inflated fees for the return preparation services, and increasing their
clientele by advertising guaranteed larger refunds. Taxpayers should choose
carefully when hiring a tax preparer — no matter who prepares the return, the
taxpayer is ultimately responsible for all of the information on that return.
-
Americans with Disabilities
Act.
Another scheme seen for several years involves the purchase of equipment and
services that the promoter alleges meets the strict criteria of the Disabled
Access Credit, which was created with the passage of the “Americans with
Disabilities Act”. A minimal payment is made and a non-recourse note signed.
The investor then provides insignificant services to complete the purchase
agreement. This scheme is based on an incorrect interpretation of law and an
over-inflated value of the services rendered.
-
African-Americans Get a
Special Tax Refund. Thousands of African‑Americans have been misled by
people offering to file for tax credits or refunds related to reparations for
slavery. There is no such provision in the tax law. Some unscrupulous
promoters have encouraged clients to pay them to prepare a claim for this
refund. But the claims are a waste of money. Promoters of reparations tax
schemes have been convicted and imprisoned. And taxpayers could face a $500
penalty for filing such claims if they do not withdraw the claim. Related
scams include claiming an illegal tax credit by misusing Form 2439, “Notice to
Shareholder of Undistributed Long-Term Capital Gains.” The slavery reparations
scam was at the top of the 2002 “Dirty Dozen,” and, although claims have
fallen considerably, the IRS continues to see activity in this area.
-
Improper Home-Based
Business.
This scheme purports to offer tax “relief” but in reality is illegal tax
avoidance. The promoters of this scheme claim that individual taxpayers can
deduct most, or all, of their personal expenses as business expenses by
setting up a bogus home-based business. But the tax code firmly establishes
that a clear business purpose and profit motive must exist in order to
generate and claim allowable business expenses. This scam has been around for
years, but the IRS continues to see activity in this area.
-
Frivolous Arguments.
Frivolous arguments are false arguments that are unsupported by law. When a
scheme promoter says “I don’t pay taxes – why should you” or urges you to
“untax yourself for $49.95,” beware. The ads may claim that the promoter knows
the “secret” for never paying taxes again, but that’s just plain wrong. The
U.S. courts have continuously rejected this and other frivolous arguments.
Unfortunately, people across the country have paid for the “secret” of not
paying taxes or have bought “untax packages.” Then they find out that
following the advice contained in them can result in civil and/or criminal
penalties. Numerous sellers of the bogus schemes have been convicted on
criminal tax charges. More than a dozen injunctions have been issued.
-
Identity Theft.
Identity thieves use someone’s personal data to steal his or her financial
accounts, run up charges on the victim’s existing credit cards, apply for new
loans, credit cards, services or benefits in the victim’s name and even file
fraudulent tax returns. The IRS is aware of several identity theft scams
involving taxes or the IRS. In one example, fraudsters sent bank customers
fictitious bank correspondence and IRS forms in an attempt to trick them into
disclosing their personal and banking data. In another, abusive tax preparers
have used clients’ Social Security numbers and other information to file false
tax returns without the clients’ knowledge. For taxpayers, it pays to be
choosy about disclosing personal and financial information. And the IRS
encourages taxpayers to carefully select a reputable tax professional.
- Share/Borrow EITC Dependents. Unscrupulous tax preparers "share" one client's qualifying children with another client in order to allow both clients to claim the Earned Income Tax Credit. For example, one client may have four children but only needs to list two to get the maximum EITC. The preparer will list two children on the first client’s return and the other two on another client’s tax return. The preparer and the client "selling" the dependents split a fee. The IRS prosecutes the preparers of such fraudulent claims, and participating taxpayers could be subject to civil penalties.
Beyond the “Dirty Dozen,” the IRS sees many more tax schemes. In one, a telephone caller says you’ve won a prize, and all you have to do to get it is to pay the income tax due — to the caller. Other scams can play off recent news events, such as one last year targeting members of the military.
“Taxpayers should think carefully before paying for services or signing important documents,” Everson said. “Don’t be a victim of these scams or others that promise the moon. They carry a high price.”
Let’s talk?
Call us today at 310-216-7632 or email us at Rnorris@ricknorriscpa.com for a free consultation
"Rick Norris has been an outstanding business advisor & tax consultant
for my company. We have, and continue to, rely on him for advice
regarding strategic planning, business issues, as well as tax preparation. Truly an outstanding business executive."
Randy Parker
PARKER MUSIC GROUP
Copyright© 2004, Rick Norris, 5757 W. Century Blvd, 7th Floor, Los Angeles, CA 90045