8 Sure Ways To Tempt Fate And The IRS
Con artists have been ripping off taxpayers -- millions of them -- by touting
various trusts, credits and legal strategies. But it's the person who signs
the returns who's on the hook with the feds.
Let's say you're thinking about your taxes and worried about getting
zapped for so much taxable income or so many deductions that you qualify
for the alternative minimum tax.
And then the phone rings with an irresistible offer. The caller confides that
(for a fee ranging from $5,000 to $70,000) he can help you set up a credit-
card account in a tax haven country with money you do not report to the
Internal Revenue Service. Then you get a credit or debit card to draw
down on the account for personal expenses.
Sound too good to be true? It potentially is. But that hasn’t stopped nearly
2 million people from already trying to take advantage of the scam. And
there are plenty of other con artists looking to prey on you with other
scams.
Don’t be tempted by hucksters claiming they can help vastly reduce your
tax burden or show you how to pay no taxes at all.
The IRS has cracked down on some of the scams, but Senate Finance
Chairman Max Baucus, D-Mont., believes the agency hasn’t done enough
-- so consumers are still at risk to the temptations. "We may be seeing a
dramatic rise in flagrant, flat-out cheating,'' Baucus said at a recent
hearing. "We need better enforcement of the laws that are already on the
books.''
While the incidence of serious tax abuse is relatively small – less than 2%
of all returns filed for 2001, the government is worried it’s getting worse,
and pressure is mounting to crack down on it. Here are eight of the biggest
scams to watch for:
Scam 1: Shelter income by moving your money offshore
According to a Finance Committee report, there’s been a strong increase
in the “use of credit or debit cards by people to access offshore accounts
established in tax-haven countries to conceal taxable income.” The
accounts are being set up by banks, brokerages, accounting firms and
others for very affluent people -- entertainers, lawyers, doctors and other
professionals. Offshore accounts are of little use to people whose wages
are reported to the IRS by employers.
Daniel Bullock, a former physician for the U.S. cycling team, appeared at
Baucus' hearing and told how easy it is to be suckered into illegal tax
shelters by con artists. Much of the information comes from the Internet, he
testified, and makes claims that courts have repeatedly refused to ratify.
Bullock is now serving 18 months in federal prison for tax evasion. He was
convinced by a Utah promoter to set up a series of domestic and offshore
trusts that would filter the money out so that it was impossible to track back
to the doctor. Under the scheme, he could get the money in a second trust
and use the cash tax-free for personal expenses.
IRS commissioner Charles Rossotti said the agency has launched a major
crackdown on credit cards issued by banks such as Swiss American Bank
Ltd., Royal Bank of Canada, and HSBC Bank International with operations
in places such as the Bahamas and the Cayman Islands. The General
Accounting Office estimates that 1million to 2 million Americans have
offshore credit-card accounts in tax-haven countries, and fraudulent
activities cost the Treasury $20 billion to $40 billion a year.
Only an estimated 170,000 of these people state on their federal income
tax returns that they have such off-shore accounts. The accounts are legal
so long as income generated to the accounts is reported and taxes paid.
Failure to disclose the income is a felony punishable by up to five years in
prison.
The IRS has convinced VISA, Master Card and American Express to turn
over lists of U.S. residents with credit card accounts domiciled outside the
United States. The goal to find out who has an offshore account and, more
importantly, who has not reported it and the income illegally disguised, the
Baucus report said.
But the General Accounting Office, the investigative arm of Congress, says
the IRS has not gone far enough to protect consumers. Bullock’s lawyer,
Jennifer Prager Sodaro, and Michael Brostek, director of tax issues for the
General Accounting Office agreed the IRS should get more help from the
courts and more staff to enforce tax laws.
Scam 2: Cut your taxes with abusive trusts at home
In addition to the offshore accounts, the IRS has also detected a sharp
increase in the abuse of domestic trusts set up to conceal taxable income.
The schemes are usually offered in a series of trusts layered upon each
other by promoters who target people with incomes in at least six figures.
Here’s how they work:
• A promoter advises a taxpayer to start an asset management
company (AMC), with the taxpayer listed as the director of a domestic
trust. This gives the illusion that the taxpayer is not managing his business
and allows him to start layering the process.
• Then, a business trust is formed with the AMC serving as the
trustee. False administrative expenses may be deducted from the trust as
a way of cutting taxable income. “The scheme gives the appearance that
the taxpayer has given up control of their business to a trust; however, in
reality the taxpayer is still running the day-to-day activities of their
business and is controlling its income stream,” says an IRS report on the
scam.
• Next comes an equipment or service trust to hold equipment that’s
rented or leased to the business trust at inflated rates. This lets the
business trust reduce its income by claiming deductions for payments to
this trust.
• In some promotions, taxpayers are also encouraged to start a
charitable trust to pay for personal, education or recreational expenses.
These expenses are falsely claimed as “charitable deductions” on the trust’
s tax returns. Any remaining balance of income, usually a small amount, is
then distributed to the taxpayer.
But be forewarned: Uncle Sam is catching up to the crooks. The IRS has
opened 21 criminal investigations since October and has scored eight
indictments plus eight convictions. The average prison time meted out to
those individuals has been 37 months.
Scam 3: Try to claim the tax code is unconstitutional
Don’t fall for the 16th Amendment scam. The Senate Finance panel is
scheduled to hear testimony from a victim now under house detention for
participating in a tax protest scheme. The scheme was pushed by a
promoter claiming that the 16th Amendment authorizing the federal income
tax was never ratified, and thus citizens do not have to file a return. For
more on this question, see “5 reasons you really do have to pay the IRS."
The victim paid the promoter $1,500 for a packet that explained how he
could become part of a movement of people who have decided to “un-tax”
themselves. The packet included a series of sample letters to send to the
IRS making the case that he did not have to pay taxes.
When the IRS started a collection action against the victim, he made his
own situation worse. He gave $100,000 to the promoter to hide in an
offshore account, which the promoter ended up taking for his own use.
Then he really hit rock bottom: The victim’s original attorney believed in
the protest movement and sucked another $70,000 out of him, before the
victim finally wised up and found a new attorney.
Scam 4: Claim all personal expenses as business expenses
A small businesswoman from Baucus' home state of Montana was
convinced by a con artist that she would be able to legally deduct all of her
personal expenses as business expenses.
The scheme involved setting up two trusts: one for the business and one
for the woman’s personal expenses. She paid a total of $10,000 to the con
artist to set up these trusts and prepare her return.
According to Senate staff, the promoter advised claiming just about
everything for a business expense deduction and even supplied false
invoices to help. The promoter also changed the numbers on the tax form
submitted by the victim in order to eliminate any tax liability at all.
The woman involved has six children and no medical or life insurance. She
went ahead with the scheme because she thought it was the only way to
provide safety and security for her family.
But it all backfired. In addition to the $10,000 she shelled out to the scam
artist, the IRS has slapped a $32,000 lien on her home until the proper tax
payment is worked out. As a result of the lien, the woman has not been
able to get any loans for her business.
Scam 5: Claim the so-called African-American reparations credit
Some 90,000 taxpayers have filed specious claims in recent years with the
IRS for a “reparations credit” payable to descendants of slaves. There is
no such credit. For more on this, see “IRS cracks down on slavery claims.”
The problem has been made worse by the fact that the IRS has not been
effective in stopping the bogus claim. In 2001, many taxpayers claiming the
reparations credit did receive refunds, some of them the tune of $80,000
for married taxpayers. And that forced the IRS to move to take the money
back.
The Treasury Department’s inspector general for tax administration has
now developed software to help the IRS detect and stop claims for
reparations. In an embarrassing twist for the IRS, the inspector general's
office discovered one current and eight former IRS employees who
claimed the credit.
Scam 6: You can get a refund on your Social Security taxes
The IRS has sent out a warning about a scam in which taxpayers are
offered refunds of the Social Security taxes they have paid during their
lifetimes. The scam artist merely collects a “paperwork” fee of $100, plus a
percentage of any refund received, as long as the taxpayer files a refund
claim with the IRS.
“This is nothing more than a hoax designed to fleece the victims for the
upfront fee,” said Ted Brown, IRS assistant commissioner for criminal
investigation. “The law does not allow such a refund of Social Security
taxes paid, and the IRS will contact taxpayers filing these claims.”
“Contact” is a nice way of saying that you are likely to trigger an audit with
such a frivolous claim. In fact, the IRS has already blocked nearly 1,100
refund claims totaling nearly $95 million. Brown noted that you should be
skeptical of any “tax professional” who demands a fee tied to a percentage
of the refund because it’s likely to be a scam.
Scam 7: Your tax preparer promises really big deductions
The IRS advises that upon choosing a tax preparer, you should be as
careful as you would in choosing a doctor or a lawyer. The IRS has a
special Criminal Investigation Return Prepare Program to root out
unscrupulous or incompetent return preparers.
The problem for taxpayers is that even if the preparer gets in hot water,
you are ultimately responsible for all of the information on your return. At
best, you will be stuck with paying additional taxes and interest.
At worst, depending on culpability, you could be subject to penalties and
maybe even criminal prosecution. Don’t forget that tax evasion is a felony
punishable by five years imprisonment and a $10,000 fine.
Dishonest tax preparers use several methods to create illegal deductions
reducing taxable income including, preparing fraudulent Schedule C, Profit
or Loss from Business; and claiming deductions for expenses that have
not been paid by the taxpayer for expenses that have not been paid to
offset form 1099, Miscellaneous Income.
They also come up with false or inflated itemized deductions on Schedule
A for:
• Charitable contributions
• Medical and dental expenses
• Claiming false dependents
• Claiming false losses on IRS Schedule E. (This covers supplemental
income and losses from rental properties, partnerships, royalties, trusts
and the like.)
Here are some hints to help protect yourself:
• Avoid tax preparers who claim they can get larger refunds than their
competitors.
• Make sure the preparer signs your tax return and provides you with a
copy for your records.
• Never sign a blank tax form.
Scam 8: Your company scams its way to avoid payroll taxes
The most prevalent methods of tax evasion by employers include
pyramiding, employee leasing, paying employees in cash, filing false
payroll tax returns or failing to file payroll tax returns.
So-called pyramiding of employment taxes is a fraudulent practice where a
business withholds taxes from its employees but intentionally fails to remit
them to the IRS. Businesses involved in this game often file for bankruptcy
to evade the liabilities accrued and then start a new business under a
different name and start all over again.
Employee leasing is a legal practice of contracting with outside businesses
to handle all administrative, personnel and payroll concerns for employees.
But some employee-leasing companies end up not paying any portion of
the collected employment taxes to the IRS.
If you’re an employee and your employer has failed to pay the income tax,
Social Security and Medicare taxes withheld from your paycheck, you’re
not likely to be held liable. But you have to be able to prove that the money
was, in fact, withheld and that you had nothing to do with the fraud. The
best proof is a set of valid pay stubs. The employer, meanwhile, is in big
trouble because, by withholding the taxes, he’s been acting as an agent
for the government. He’s personally liable.
If you have any concerns about your employer’s activities or if you feel like
you are being targeted by a scam artist, the IRS says, seek professional
advice from the federal agency or a private tax professional. You can
report suspected tax fraud activity to the IRS by calling 1-800-829-0433.
