Tax Tips

Every year, the IRS compiles a list of the 12 most egregious tax schemes and scams. Topping the list for 2009 is phishing, which includes numerous Internet-based tricks to steal financial information from you.

The IRS urges taxpayers to avoid these common schemes:

1. Phishing. Identity thieves use this technique to acquire your personal data to gain access to financial accounts. They send phony e-mails, usually posing as representatives of a financial company or the IRS itself. A typical tax fraud e-mail notifies you of an outstanding refund or audit and urges you to click on a link and input your social security and credit card numbers. The reality is the IRS never uses e-mail to initiate contact with you regarding your accounts. If you receive unsolicited e-mail that claims to be from the IRS, you can forward the message to phishing@irs.gov. Remember, the only official IRS Web site is www.irs.gov.



2. Hiding Income Offshore. Individuals continue to try to avoid paying taxes by illegally hiding income in offshore bank and brokerage accounts or using offshore debit cards, credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance plans. Recently, the IRS provided guidance to auditors on how to deal with those hiding income offshore in undisclosed accounts. The IRS draws a clear line between taxpayers with offshore accounts who voluntarily come forward and those who fail to come forward.



3. Filing False or Misleading Forms. Scam artists will file false or misleading returns to claim refunds that they are not entitled to. Frivolous information returns, such as Form 1099-Original Issue Discount (OID), claiming false withholding credits are used to legitimize erroneous refund claims. The new scam has evolved from an earlier phony argument that a "strawman" bank account has been created for each citizen. Under this scheme, taxpayers fabricate an information return, arguing they used their "strawman" account to pay for goods and services and falsely claim the corresponding amount as withholding as a way to seek a tax refund.



4. Abuse of Charitable Organizations and Deductions. Misuse of tax-exempt organizations includes arrangements to improperly shield income or assets from taxation, attempts by donors to maintain control over donated assets or income from donated property, and overvaluation of contributed property. Also of concern to the IRS are various schemes involving the donation of non-cash assets, including easements on property, closely held corporate stock and real property. Often, the donations are highly overvalued or the organization receiving the donation promises that the donor can purchase the items back at a later date at a price the donor sets. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions.



5. Return Preparer Fraud. Dishonest tax return preparers make their money by skimming a portion of their clients' refunds and charging inflated fees for return preparation services. Some preparers promote the filing of fraudulent claims for refunds on items such as Fuel Tax Credits to recover taxes paid in prior years. You should choose carefully when hiring a tax preparer, especially one who promises something that seems too good to be true.



6. Frivolous Arguments. Frivolous schemes provide unreasonable and unfounded claims to avoid paying the taxes you owe. The IRS keeps a list of frivolous arguments that you should stay away from. Taxpayers who file a tax return or make a submission based on one of these positions on the list are subject to a $5,000 penalty.



7. False Claims for Refund and Requests for Abatement. This scam involves a request for abatement of previously assessed tax using Form 843, "Claim for Refund and Request for Abatement." Many individuals who try this have not previously filed tax returns. The tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program. The filer uses Form 843 to list reasons for the request. Often, one of the reasons given is "Failed to properly compute and/or calculate Section 83-Property Transferred in Connection with Performance of Service."



8. Abusive Retirement Plans. The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to Roth IRAs as well as transactions that are not properly reported as deductions. You should be wary of advisers who encourage you to shift appreciated assets into IRAs or companies owned by their IRAs at less than fair market value to circumvent annual contribution limits. In one variation of the scheme, a promoter has you move a highly appreciated asset into a Roth IRA at cost value, which is below annual contribution limits even though the fair market value far exceeds the amount allowed. Other variations have included the use of limited liability companies to engage in activity that is considered prohibited.



9. Disguised Corporate Ownership. Some people are going as far as forming domestic shell corporations in certain states for the purpose of disguising the ownership of a business or financial activity. Once formed, these anonymous entities can be used to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, engaging in listed transactions, money laundering, financial crimes and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance.



10. Zero Wages. In this scam, taxpayers attach either a Form 4852 (substitute Form W-2) or a "corrected" Form 1099 that shows zero or little income. This includes a statement indicating that they're rebutting information that they previously submitted to the IRS. The explanation on Form 4852 may cite "statutory language behind IRC 3401 and 3121" or may include some reference to their employers refusing to issue a corrected Form W-2 for fear of IRS retaliation. The Form 4852 or 1099 is usually attached to a Zero Return.



11. Misuse of Trusts. For years, scammers 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. Also, the IRS has recently seen an increase in the improper use of private annuity trusts and foreign trusts to divert income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust arrangement.



12. Fuel Tax Credit Scams. The IRS is receiving claims for the Fuel Tax Credit that are unreasonable. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the Fuel Tax Credit. But some people are claiming the credit for nontaxable uses of fuel when their jobs or income levels make the claims unreasonable. Fraud involving the Fuel Tax Credit is considered a frivolous tax claim, potentially subjecting those who improperly claim the credit to a $5,000 penalty.

Report Suspected Tax Fraud Activity

Suspected tax fraud can be reported to the IRS using Form 3949-A - Information Referral. 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 identity of the person filing the report can be kept confidential.