Last week we introduced the Dirty Dozen and gave a
little information regarding the top tax scams that the IRS will be watching
out for this year. You can read Dirty Dozen Part I to make sure
you are up to speed.
False Form 1099 Refund
In this ongoing scam, the perpetrator files a fake information
return, such as a Form 1099 Original Issue Discount (OID), to justify a false
refund claim on a corresponding tax return. In some cases, individuals have
made refund claims based on the bogus theory that the federal government
maintains secret accounts for U.S. citizens and that taxpayers can gain access
to the accounts by issuing 1099-OID forms to the IRS.
Don’t fall prey to people who encourage you to claim deductions or
credits to which you are not entitled or willingly allow others to use your
information to file false returns. If you are a party to such schemes, you
could be liable for financial penalties or even face criminal prosecution.
Promoters of frivolous schemes encourage taxpayers to make
unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS
has a list of frivolous tax arguments that taxpayers
should avoid. These arguments are false and have been thrown out of court.
While taxpayers have the right to contest their tax liabilities in court, no
one has the right to disobey the law.
Falsely Claiming Zero Wages
Filing a phony information return is an illegal way to lower the
amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form
W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable
income to zero. The taxpayer may also submit a statement rebutting wages and
taxes reported by a payer to the IRS.
Sometimes, fraudsters even include an explanation on their Form
4852 that cites statutory language on the definition of wages or may include
some reference to a paying company that refuses to issue a corrected Form W-2
for fear of IRS retaliation. Taxpayers should resist any temptation to
participate in any variations of this scheme. Filing this type of return may
result in a $5,000 penalty.
Abuse of Charitable Organizations and Deductions
IRS examiners continue to uncover the intentional abuse of
501(c)(3) organizations, including arrangements that improperly shield income
or assets from taxation and attempts by donors to maintain control over donated
assets or the income from donated property. The IRS is investigating schemes
that involve the donation of non-cash assets –– including situations in which
several organizations claim the full value of the same non-cash contribution.
Often these donations are highly overvalued or the organization receiving the
donation promises that the donor can repurchase the items later at a price set
by the donor. The Pension Protection Act of 2006 imposed increased penalties
for inaccurate appraisals and set new standards for qualified appraisals.
Disguised Corporate Ownership
Third parties are improperly used to request employer
identification numbers and form corporations that obscure the true ownership of
These entities can be used to underreport income, claim fictitious
deductions, avoid filing tax returns, participate in listed transactions and
facilitate money laundering, and financial crimes. The IRS is working with
state authorities to identify these entities and bring the owners into
compliance with the law.
Misuse of Trusts
For years, unscrupulous promoters have urged taxpayers to transfer
assets into trusts. While there are legitimate uses of trusts in tax and estate
planning, some highly questionable transactions promise reduction of income
subject to tax, deductions for personal expenses and reduced estate or gift
taxes. Such trusts rarely deliver the tax benefits promised and are used
primarily as a means of avoiding income tax liability and hiding assets from
creditors, including the IRS.
IRS personnel have seen an increase in the improper use of private
annuity trusts and foreign trusts to shift income and deduct personal expenses.
As with other arrangements, taxpayers should seek the advice of a trusted
professional before entering a trust arrangement.
We are nearing March and you know
what that means! April is right around the corner. Make sure you schedule some time to come see
us for a quick and efficient tax refund.
Disclaimer: Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.