Learn more about keeping your business compliant with federal tax requirements.
If you want to spend quality time with an IRS auditor, try and capitalize upon one or more of the “dirty dozen” tax scams released by the IRS. Or, if you are like most people and don’t find tax audits enjoyable, you will want to consult the list to make sure that you aren’t calling attention to yourself by relying on one of these scams to lower your tax bill.
Each year, the IRS complies its list of the most egregious schemes that it has on its radar. The 2011 “dirty dozen” includes hiding income in offshore accounts, identity theft, return preparer fraud, and filing false or misleading tax forms. “The Dirty Dozen represents the worst of the worst tax scams,” IRS Commissioner Doug Shulman said. “Don’t fall prey to these tax scams. They may look tempting, but these fraudulent deals end up hurting people who participate in them.”
Hiding Income Offshore
The IRS aggressively pursues taxpayers involved in abusive offshore transactions as well as the promoters, professionals and others who facilitate or enable these schemes. Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks, brokerage accounts or through the use of nominee entities. Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or insurance plans.
Tip. Not all offshore accounts and trusts are fraudulent tax evasion: Some offshore strategies facilitate asset protection and lower rates of taxation legally. It is essential to work with a reputable tax professional who can leverage the planning opportunities without crossing a line that could result in civil and criminal penalties.
If you have engaged in these practices, you should act now to get back into compliance with the United States tax system. Until August 31, 2011, the IRS has a special voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes. Information about this initiative is available on IRS.gov in eight different languages other than English, including Chinese, Farsi, German, Hindi, Korean, Russian, Spanish, and Vietnamese.
Identity Theft and Phishing
Identity theft occurs when someone uses an unsuspecting individual’s name, Social Security number, credit card number or other personal information without permission to commit fraud or other crimes. This can pose a danger at tax time because a criminal with someone else’s personal information can file a fraudulent tax return and collect a refund, forcing you untangle the mess—-most likely through costly and time-consuming administrative and legal proceedings.
Phishing is a tactic used to steal your identity by tricking you into revealing personal or financial information online. Phishing involves the use of phony e-mail, web sites, or (increasingly) social media. IRS impersonation schemes are popular year round, but greatly increase during tax season.
Tip. The IRS never initiates contact with a taxpayer via e-mail. If you receive an unsolicited email that claims to be from the IRS, it’s not legitimate. It is a phishing scam! The IRS suggests taking the following steps:
Identify thieves also use spyware, which can be loaded onto an unsuspecting taxpayer’s computer by opening an e-mail attachment or clicking on a link, to steal personal information. This presents a special danger if you use public-use computers, such as those in cyber-cafes or libraries. One should avoid using public computers for financial transactions, including tax return preparation and payments.
If you have any concerns that your personal information has been stolen and used for tax purposes, you should immediately contact the IRS Identity Protection Specialized Unit at 1-800-908-4490. There is more information on identity theft and taxes available on the IRS website.
Return Preparer Fraud
While most return preparers are professionals who provide honest and excellent service to their clients, dishonest and incompetent return preparers can cause big trouble for you. To help protect yourself, interview the preparer to gauge his or her understanding of both the tax code and your business. And, make sure that your preparer has a Preparer Tax Identification Number (PTIN.) As part of its mission to increase confidence in the tax system and improve compliance with the tax law, the IRS now requires that paid preparers register with the IRS and obtain a PTIN before preparing any federal tax returns in 2011.
Filing False or Misleading Forms
It should go without saying that it is unwise to claim deductions and credits that you are not entitled to claim. However, the IRS reports that many people try and do so. This year they give special mention to these schemes:
Promoters of frivolous schemes encourage people to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous legal positions that taxpayers should avoid. Among these frivolous arguments:
These arguments are false. On their face, these are completely laughable. However, the IRS is not noted for a sense of humor in this regard. If you try to use any of them, expect to be prosecuted and found guilty.
Nontaxable Social Security Benefits with Exaggerated Withholding Credit
The IRS has uncovered returns where taxpayers report nontaxable Social Security Benefits with excessive withholding, which results in no tax due. Because of the numerous matching programs within the IRS, people who try this are very likely to be caught. The IRS points out that this type of fraudulent may result in a $5,000 penalty.
Abuse of Charitable Organizations and Deductions
The misuse of tax-exempt organizations once again makes into onto the IRS’s dirty dozen. Abuse includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property.
Tip. There are certainly many legal and effective ways to donate property to a charity while retaining income or benefits for yourself. For example, a properly established Charitable Remainder Annuity Trust (CRAT) provides you with a lifetime annuity while ensuring that the charity receives property upon your death. A reputable financial planner has many legal strategies to enable both you and a charity to benefit from your property.
Despite rules requiring appraisals and stringent documentation of non-cash donations, the IRS finds that people still try to claim improper deductions. Failure to provide adequate document of non-cash contributions is an audit red flag. Bear in mind, the organizations wrong-doing isn’t going to get you off the hook—-although it might mean you will face only negligence penalties, rather than the far more painful fraud penalties. Beware of highly over-valued appraisals or suggestions that you can donate the property and repurchase it later at a price you establish.
Circumventing IRA Rules
The IRS is on the lookout for abuses of the Individual Retirement Account rules, such as trying to get around the contribution limits or not properly reporting early distributions. You are also advised to beware of “advisers” who try and tell you that you can put appreciated property into an IRA at less than the property’s current fair market value.
Disguised Corporate Ownership
There are many valid reasons to select a state for incorporating your business or forming your LLC. However, you will find yourself on the wrong side of the law if you attempt to camouflage the ownership of the corporation or LLC in order to underreport of income, claim fictitious deductions, not file tax returns, participate in listed transactions, launder money, commit financial crimes or fund terrorist organizations. In recent years, the IRS has stepped up its cooperation and partnerships with state authorities to track down these disguised corporations.
Fraudulent Use of Trusts
There are many legitimate, valid uses of trusts in tax and estate planning. However, the IRS warns that some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses, and reduced estate or gift taxes. Not only are these shady trusts unlikely to provide any tax benefits, they may cost you significant amounts of interest and penalties when the IRS invalidates them. There’s been a recent increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As a result, private annuity trust arrangements are going to come under strict scrutiny. That is not to say that every private annuity trust is fraudulent and will create problems. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.