The Top 12 Tax Scams

The IRS recently issued a consumer alert that listed the top 12 tax scams, and urged taxpayers to avoid falling victim to one of these "Dirty Dozen." These scams are perpetrated by unscrupulous tax preparers as well as individuals. 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, resulting 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.

The Dirty Dozen:

1. Offshore Transactions - Some people use offshore transactions to avoid paying United States income tax. Use of an offshore credit card, trust, 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 will be subject to payment of taxes, interest, penalties, and potential criminal prosecution.

2. Identity Theft - Some tax preparers have used information such as Social Security numbers and financial information from their clients' tax returns to commit identity theft. The IRS encourages taxpayers to carefully select a reputable tax professional and be very careful when giving out personal information, especially their Social Security number.

3. Phony Tax Payment Checks - In this scheme, con artists sell fictitious financial instruments that look like checks to pay a tax liability. The con artists also may counsel their clients to use a phony check to overpay their taxes so they can receive a refund from the IRS for the overpayment. The false checks, called sight drafts, are worthless and have no financial value. It is illegal to use these sight drafts to pay a tax liability or other debts.

4. 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 reparation tax schemes have been convicted and imprisoned. And, taxpayers could face a $500 penalty for filing such claims if they do not withdraw them.

5. No Taxes Withheld From Wages - Illegal schemes are being promoted that instruct employers not to withhold federal income tax or employment taxes from wages paid to their employees. These schemes are based on an incorrect interpretation of tax law and have been refuted in court. A recent flurry of court actions has been taken against promoters of these schemes.

6. 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. However, the tax code firmly establishes that a clear business purpose and profit motive must exist in order to generate and claim allowable business expenses.

7. Pay the Tax, Then Get the Prize - A telephone caller says you've won a prize, and all you have to do to get it is pay the income tax due. Don't believe it. Someone who really wins a prize may need to make an estimated tax payment to cover the taxes that will be due at the end of the year. And, the payment goes to the IRS – not the caller. A legitimate prize giver generally sends both the winner and the IRS a Form 1099, showing the total prize value that should be reported on the winner's tax return.

8. 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. These scams are as old as snake oil, but people continue to be taken in. And now they are on the Internet. The ads may say that paying taxes is "voluntary," but that's just plain wrong. U.S. courts have continuously rejected this and other frivolous arguments. Unfortunately, hundreds of 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.

9. Social Security Tax Scheme - Taxpayers shouldn't fall victim to a scam that offers refunds of Social Security taxes they have paid during their lifetimes. The scam works by the victim paying a "paperwork" fee of $100, plus a percentage of any refund received, to file a refund claim with the IRS. This hoax fleeces the victims for the up-front fee. The law does not allow such a refund of Social Security taxes paid. IRS processing centers are alert to this hoax and have been stopping the false claims.

10. "I Can Get You a Big Refund – for a Fee!" Refund-scheme operators may approach someone wanting to "borrow" their Social Security number or give them a phony W-2 so that it appears the person qualifies for a big refund. They may promise to split the refund with that person, but the IRS catches most of these false refund claims before they go out. And when one does go out, the participant usually ends up paying back the refund along with stiff penalties and interest. Never sign a tax return without looking it over to make sure it's honest and correct.

11. 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 needs to list only 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.

12. An IRS "Agent" Comes to Your House to Collect - First, do not let anyone into your home unless they identify themselves to your satisfaction. IRS special agents, field auditors, and collection officers carry picture IDs, and normally will try to contact you before they visit. If you think the person on your doorstep is an impostor, lock your door and call the local police.

In conclusion, forewarned is forearmed. Do not fall for the Dirty Dozen, and choose your tax preparer carefully. Remember, when you sign your return, you are liable for everything on it.

If you have any questions regarding tax regulations as they apply to gaming that you would like to see answered in Card Player, please mail or e-mail them to us ([email protected]). We will keep your identity confidential. If you would like to utilize our professional services or order our book, The Tax Guide for Gamblers, please call (800) 829-7271. R.B.S. will prepare your return without your having to leave the comfort of your home, no matter where you live.