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March 20, 2005 - Dirty Dozen Tax Scams

The IRS has unveiled its latest list of notorious tax scams, which it calls the “Dirty Dozen.” It does this each year to remind taxpayers to be wary of schemes that promise to eliminate taxes. The IRS has identified the following tax scams as this year's “Dirty Dozen:”

1. Trust misuse. Unscrupulous promoters for years 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, and the IRS is actively examining these arrangements.

2. Frivolous arguments. The IRS warns taxpayers to be aware of frivolous arguments such as wages are not income.

3. Return preparer fraud. Dishonest return preparers derive financial gain by skimming a portion of their clients' refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds.

4. Credit counseling agencies. TheIRS says that taxpayers should be careful with credit counseling organizations that claim they can fix credit ratings, push debt payment agreements or charge high fees, monthly service charges or mandatory “contributions” that may add to debt.

5. “ Claim of right” doctrine. In this scheme, a taxpayer files a return and attempts to take a deduction equal to the entire amount of his or her wages. The deduction has no basis in law.

6. “No gain” deduction. Here, filers attempt to eliminate their entire adjusted gross income by deducting it on Schedule A. The filer lists his AGI under the Schedule A section labeled “Other Miscellaneous Deductions” and attaches a statement to the return, referring to court documents and including the words “No Gain Realized.”

7. Corporation sole. Some taxpayers attempt to reduce their federal tax liability by taking the position that the taxpayer's income belongs to a “corporation sole” created by the taxpayer for the purpose of avoiding taxes on the taxpayer's income.

8. Identity theft. The IRS says it is aware of several identity theft scams involving taxes. In one case, fraudsters sent bank customers fictitious correspondence and IRS forms in an attempt to trick them into disclosing their personal financial data. In another, abusive tax preparers used clients' Social Security numbers and other information to file false tax returns without the clients' knowledge. Sometimes scammers pose as the IRS itself. A taxpayer who has any doubt whether a contact from the IRS is authentic can call 1-800-829-1040 to confirm it.

9. Abuse of charitable organizations and deductions. The IRS says it has observed an increase in the use of tax-exempt organizations to improperly shield income or assets from taxation. This can occur, for example, 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, thereby obtaining a tax deduction without transferring a commensurate benefit to charity.

10. Offshore transactions. TheIRS says individuals try to avoid U.S. taxes by illegally hiding income in offshore bank and brokerage accounts or using offshore credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities, or life insurance to do so.

11. Zero return. Promoters instruct taxpayers to enter all zeros on their federal income tax filings.

12. Employment tax evasion. The IRS says it has seen a number of illegal schemes that instruct employers not to withhold federal income tax or other employment taxes from wages paid to their employees.

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