CARL WATTS & ASSOCIATES

May 9th, 2011

www.carlwatts.com
office@carlwatts.com
Washington DC
 tel/fax 202 350-9002
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In a consumer protection effort to warn taxpayers off tax ideas that can only get them into trouble, each year the IRS releases a list of the “Dirty Dozen” which represent the worst of the worst tax scams.
Those promoting fraudulent tax ideas can face heavy fines or even prison, while taxpayers who buy in can end up with huge bills for taxes, penalties and interest.

Here’s the latest blacklist:
  • Hiding income offshore. Abusive offshore transactions are aggressively pursued by the IRS, so don’t get tempted to hide income in offshore banks, brokerage accounts or using nominee entities, offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or insurance plans. To find out more about foreign income, please read our newsletter on the subject.

  • Identity theft and phishing. Identity theft has become a major problem that affects more and more people each year. It is important that you protect your personal information at any time, and if you suspect that your personal information has been stolen and used for tax purposes, you should contact the IRS Identity Protection Specialized Unit at 1-800-908-4490. If you receive any suspicious email or a link to the IRS web address that does not begin with http://www.irs.gov you should forward it to phishing@irs.gov. More on the subject in an earlier newsletter.

  • Return preparer fraud. The IRS is implementing a number of requirements for paid tax prepares, such as applying for a Preparer Tax Identification Number (PTIN), competency tests and ongoing professional education.
Nevertheless, some tax prepares may make basic errors or engage in fraud like skimming a portion of the refund, charging inflated rates or making false promises.

So, before you turn your tax life over, make sure that the preparer you chose is right for you and has good credentials and referrals.

  • Filing false or misleading forms. Don’t fall prey to a tax preparer or any online advice that encourages you to claim deductions or credits you are not entitled to, or willingly allow others to use your information to file false returns. One of such erroneous refund claim, for instance, is filing Form 1099 Original Issue Discount (OID) to claims false withholding credits.
Tax Scams and Fraud
  • Frivolous arguments. The IRS has a whole list of frivolous legal positions that have been consistently thrown out of court. To make sure you’re not getting involved in a scheme, check the IRS publication “The Truth About Frivolous Tax Arguments”.

  • Nontaxable Social Security benefits with exaggerated withholding credit. Most Social Security benefits are nontaxable or only partially taxable. Reporting excessive withholdings may result in a $5,000 penalty.

  • Abuse of charitable organizations and/or deductions. High penalties may apply for attempts to abuse charitable organizations, to shield income or assets from tax, maintain control over donated assets or income, and over-evaluate non-cash contributions.

  • Abusive retirement plans. Do not attempt to avoid IRA limits and not report early distributions. Also, don’t try to shift appreciated assets at less than fair market value into IRAs to circumvent annual contribution limits.

  • Disguised corporations. IRS pursues in an aggressive manner illegal corporations created to shield or bury assets, to facilitate underreporting of income, money laundering, financial crimes and the like.

  • Reporting zero wages. In an attempt to reduce the actual W-2 amount, some people have reported false information on Form 4842, Corrected W-2 to lower taxes. Penalty for such fraud is again of $5,000.

  • Misuse of trusts. There are legitimate reasons to transfer assets into trusts, but reducing income, estate or gift tax responsibilities is not among them.

  • Fuel tax credit scams. Unless you are a farmer, for instance, who uses fuel to run their heavy equipment, don’t try to take this credit for your day-to-day operations of your vehicle.

If you wish to report any tax fraud, you can write a letter to the IRS or fill out Form 3949-A Information Referral.

Most important of all, stay away from promises of anything too good to be true, and if in doubt, it is always better to ask advice from a trustworthy, certified professional.


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