IR-2007-37, Feb. 20, 2007
WASHINGTON –– The Internal Revenue Service today identified 12 of
the most blatant scams affecting American taxpayers and warned
people not to fall for schemes peddled by scamsters.
This year the “Dirty Dozen” highlights five new scams that IRS
auditors and criminal investigators have uncovered. Topping off the
list are fraudulent refunds being claimed in connection with the
special Telephone Excise Tax Refund available to most taxpayers this
filing season. The IRS is actively investigating instances of this
scam involving tax preparers who are preparing inflated refund
requests.
Also new to the Dirty Dozen this year are abuses pertaining to
Roth IRAs, the American Indian Employment Credit, domestic shell
corporations and structured entities.
“Taxpayers shouldn’t let their guard down,” IRS Commissioner Mark
W. Everson said. “Don’t get taken by scam artists making outrageous
promises. If you use a tax professional, pick someone who is
reputable. Taxpayers should remember they are ultimately responsible
for what is on their tax return even if some unscrupulous preparers
have steered them in the wrong direction.”
Involvement in tax schemes leads to problems for scam artists and
taxpayers. Tax return preparers and promoters risk significant
penalties, interest and possible criminal prosecution.
The IRS urges taxpayers to avoid these common schemes:
1. Telephone Excise Tax Refund Abuses: Early
filings show some individual taxpayers have requested large and
apparently improper amounts for the special telephone tax refund. In
some cases, taxpayers appear to be requesting a refund of the entire
amount of their phone bills, rather than just the three-percent tax
on long-distance and bundled service to which they are entitled.
Some tax preparers are helping their clients file apparently
improper requests. The IRS is investigating potential abuses in this
area and will take prompt action against taxpayers who claim
improper refund amounts and against the return preparers who help
them.
2. Abusive Roth IRAs: Taxpayers should be wary
of advisers who encourage them to shift under-valued property to
Roth Individual Retirement Arrangements (IRAs). In one variation, a
promoter has the taxpayer move under-valued common stock into a Roth
IRA, circumventing the annual maximum contribution limit and
allowing otherwise taxable income to go untaxed.
3. Phishing is a technique used by identity
thieves to acquire personal financial data in order to gain access
to the financial accounts of unsuspecting consumers, run up charges
on their credit cards or apply for loans in their names. These
Internet-based criminals pose as representatives of a financial
institution –– or sometimes the IRS itself –– and send out
fictitious e-mail correspondence in an attempt to trick consumers
into disclosing private information. A typical e-mail notifies a
taxpayer of an outstanding refund and urges the taxpayer to click on
a hyperlink and visit an official-looking Web site. The Web site
then solicits a social security and credit card number. It is
important to note the IRS does not use e-mail to initiate contact
with taxpayers about issues related to their accounts. If a taxpayer
has any doubt whether a contact from the IRS is authentic, the
taxpayer should call 1-800-829-1040 to confirm it.
4. Disguised Corporate Ownership: Domestic shell
corporations and other entities are being formed and operated in
certain states for the purpose of disguising the ownership of the
business or financial activity. Once formed, these anonymous
entities can be, and are being, used to facilitate underreporting of
income, non-filing of tax returns, listed transactions, money
laundering, financial crimes and possibly terrorist financing. The
IRS is working with state authorities to identify these entities and
to bring their owners into compliance.
5. Zero Wages: In this scam, which first
appeared in the Dirty Dozen in 2006, a Form 4852 (Substitute Form
W-2) or a “corrected” Form 1099 showing zero or little income is
submitted with a federal tax return. The taxpayer may include a
statement rebutting wages and taxes reported by the payer to the
IRS. An explanation on the Form 4852 may cite statutory language
behind Internal Revenue Code sections 3401 and 3121 or may include
some reference to the paying company refusing to issue a corrected
Form W-2 for fear of IRS retaliation.
6. Return Preparer Fraud: Dishonest return
preparers can cause many headaches for taxpayers who fall victim to
their schemes. Such preparers make their money by skimming a portion
of their clients’ refunds and charging inflated fees for return
preparation services. They attract new clients by promising large
refunds. Some preparers promote filing fraudulent claims for refunds
on items such as fuel tax credits to recover taxes paid in prior
years. Taxpayers should choose carefully when hiring a tax preparer.
As the old saying goes, “If it sounds too good to be true, it
probably is.” Remember that no matter who prepares the return, the
taxpayer is ultimately responsible for its accuracy. Since 2002, the
courts have issued injunctions ordering dozens of individuals to
cease preparing returns, and the Department of Justice has filed
complaints against dozens of others. During
fiscal year 2006, 109 tax return preparers were convicted of tax
crimes and sentenced to an average of 18 months in
prison.
7. American Indian Employment Credit: Taxpayers
submit returns and claims reducing taxable income by substantial
amounts citing an American Indian employment or treaty credit.
Although there is an Indian Employment Credit available for
businesses that employ Native Americans or their spouses, there is
no provision for its use by employees. In a somewhat similar scam,
unscrupulous promoters have informed Native Americans that they are
not subject to federal income taxation. The promoters solicit
individual Indians to file Form W-8 BEN seeking relief from all
withholding of federal taxation. A recent “phishing” variation has
promoters using false IRS letterheads to solicit personal financial
information that they claim the IRS needs in order to process their
"non-tax" status.
8. Trust Misuse: For years unscrupulous
promoters have urged taxpayers to transfer assets into trusts. They
promise reduction of income subject to tax, deductions for personal
expenses and reduced estate or gift taxes. However, some trusts do
not deliver the promised tax benefits. There are currently more than
150 active abusive trust investigations underway and 49 injunctions
have been obtained against promoters since 2001. As with other
arrangements, taxpayers should seek the advice of a trusted
professional before entering into a trust.
9. Structured Entity Credits: Promoters of this
newly identified scheme are setting 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.
Forming such an entity is not a viable business purpose. In other
words, the investments are not valid, and the losses are not
deductible.
10. Abuse of Charitable Organizations and
Deductions: The IRS continues to observe the use of
tax-exempt organizations to improperly shield income or assets from
taxation. This can occur when a taxpayer moves assets or income to a
tax-exempt supporting organization or donor-advised fund but
maintains control over the assets or income. Contributions of
non-cash assets continue to be an area of abuse, especially with
regard to overvaluation of contributed property. In addition, the
IRS is noticing the return of private tuition payments being
disguised as charitable contributions to religious
organizations.
11. Form 843 Tax Abatement: This scam rests on
faulty interpretation of the Internal Revenue Code. It involves the
filer requesting 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 IRC Sec 83-Property
Transferred in Connection with Performance of Service."
12. Frivolous Arguments: Promoters have been
known to make the following outlandish claims: 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; and being required to file Form
1040 violates the Fifth Amendment right against self-incrimination
or the Fourth Amendment right to privacy. Don’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.
IRS Still Watches Scams That Fall Off the
List
Five of last year’s Dirty Dozen tax scams rotated off the list
for 2007. While the IRS has seen a decline in the occurrence of some
of these scams –– abusive credit counseling agencies, for example ––
other problems, such as offshore abusive transactions continue to be
an area of particular concern for the agency. The absence of a
particular scheme from the Dirty Dozen should not be taken as an
indication that the IRS is unaware of it or not taking steps to
counter it.
How to Report Suspected Tax Fraud
Activity
Suspected tax fraud can be reported to the
IRS using IRS Form 3949-A, Information Referral. Form 3949-A is
available for download from the IRS Web site at IRS.gov, or by mail
by calling 1-800-829-3676. The completed form or a letter detailing
the alleged fraudulent activity should be addressed to the Internal
Revenue Service, Fresno, CA 93888. The mailing should include
specific information about who is being reported, the activity being
reported, how the activity became known, when the alleged violation
took place, the amount of money involved and any other information
that might be helpful in an investigation. 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. The person may also be entitled to a reward.
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