The Dirty Dozen: Scams to Avoid

From Phishing to bogus "credit counseling" services, there are lots of scams out there. Here is a thoughtful overview of the financial traps out there:

Taxpayer Beware! 12 Tax Scams You May Encounter This Year!
By Becky Schmitz, EA, CTRS

Have you ever noticed how con artists never take time off? They are constantly on the lookout for ways to either get away with something or create havoc in people’s lives. And where better than in the income tax arena?

Because fraudsters use tax situations to hook individuals, they often manage to trick people into believing they are complying with tax laws, when in fact these lawbreakers are using trickery.

Each year the IRS reveals the newest scams known as The Dirty Dozen, which try to manipulate laws.

This year, the “Dirty Dozen” includes the following:

1. Credit Counseling Agencies: Reputable credit counseling agencies can advise you in regard to managing money and debts, but taxpayers should use caution when soliciting the help of credit counseling organizations.

They may claim to fix credit ratings but agencies that push debt payment agreements or charge high amounts for their services could potentially add to existing debt. The IRS Tax Exempt and Government Entities Division, is currently in the process of revoking the tax-exempt status of abusive agencies.

2. Form 843 Tax Abatement: This is also a new scam in which filers use IRS forms to claim their tax bills have been wrongly inflated. By misinterpreting the law, a taxpayer will wrongly try to get a refund of previous years’ taxes. Many using this scam have not previously filed tax returns.

3. Phishing: One of the more common tax scams these days is occurring on the Internet. Known as ‘Phishing,’ it is plainly an attempt at identify theft.

The unsuspecting person receives an e-mail claiming to be from the IRS but it’s actually linked to a fake IRS website meant to solicit a taxpayer’s personal information, such as Social Security numbers.

The con artist then uses the information to file for a fraudulent refund. If you receive an e-mail claiming to be from the IRS but you are suspicious, call 1-800-829-1040 to report it.

4. Zero Return: Fraudulent promoters instruct taxpayers to enter all zeros on their federal income tax filings. Naturally, returns with all zeros are not valid. If a preparer tells you to enter all zeros on your federal tax return, report him or her immediately.

5. Trust Misuse: The IRS has become very aware of Trust Misuse and is cracking down on the practice. Unscrupulous tax scheme promoters urge taxpayers to use offshore trusts to hide assets.

Taxpayers should be very cautious about Trust Misuse and seek the advice of a trusted professional before entering into a trust. If anyone encourages you to transfer your assets into a trust to reduce your amount of income subject to tax, you should be cautious. Several promoters and their clients have been prosecuted for this abuse.

6. Frivolous Arguments: Under this scam, various constitutional arguments claim that filing and paying taxes is voluntary. The fraudulent promoter will allege that the Sixteenth Amendment concerning Congressional power to lay and collect income taxes was never ratified, implying that the IRS lacks authority to collect taxes. This is absolutely untrue.

7. Return Preparer Fraud: If it sounds too good to be true, it usually is. Return Preparer Fraud usually constitutes preparing and filing false income tax returns by preparers who inflate personal or business expenses, make false deductions, include excessive exemptions, and apply credits that are not allowed.

Taxpayers are responsible for accurate tax returns, so be aware of tax return preparers who promise big refunds. Make sure the company or preparer you are working with is credible.

8. Zero Wages: This is a fairly new taxpayer scam where the taxpayer attaches an incorrect form known as Form 4852 (Substitute Form W-2) or a corrected 1099 that shows zero income or little income. It probably includes a statement indicating a rebuttal of information that was previously submitted to the IRS. Beware anyone that encourages you to declare zero wages.

9. Abuse of Charitable Organizations and Deductions: The IRS has observed increased use of tax exempt organizations that improperly shield income or assets from taxation. In this scam, a taxpayer may try to move assets or income to a tax-exempt organization, but maintains control over the income or assets.

10. Offshore Transactions: The IRS aggressively pursues those who try to avoid U.S taxes by illegally hiding income in offshore banks and brokerage accounts or uses offshore credit cards, wire transfers, foreign trusts, and employee leasing schemes to hide money. The Internal Revenue Service has beefed up the money it will spend in the next four years to investigate these activities.

11. Employment Tax Evasion: Some scam artists encourage employers not to withhold federal income tax or other income taxes. This is based on an incorrect interpretation of the related tax code and is repeatedly proven false in court.

12. No Gain Deduction: Under this scheme, some tax filers try to eliminate their entire adjusted gross income by deducting it on Schedule A with the words “No Gain Realized.” This deduction has no basis in law, so if you are confronted with this, take heed. It won’t fly with the IRS.

If you think you've been a victim of tax fraud, you may call the IRS at 1-800-829-0433 to learn more.

Becky Schmitz, owner of Centsable Accounting, has recently been named the 2006 Top Practitioner from The American Society of the Tax Problem Solvers.