Government warns of "Dirty Dozen" tax scams

USA Today (Society for the Advancement of Education), April, 2007

Would you know what to look for to avoid an abusive tax scheme? Are you aware of the tax scams that phoney preparers utilize on a daily basis? For example, if someone suggested that income tax is unconstitutional, would you believe it? Each year, the IRS reveals the latest scams that try to manipulate laws--known as the Dirty Dozen:

* Zero wages. The taxpayer attaches the incorrect Form 4852 (Substitute Form W-2) or a corrected 1099 that shows zero income or little income. It probably includes a statement indicating a rebuttal of information that was submitted previously to the IRS. Beware of anyone who encourages you to declare zero wages.

* Form 843 tax abatement. Filers use IRS forms to claim their tax bills have been inflated wrongly. By misinterpreting the law, a taxpayer will try to get a refund of previous years' taxes. Many using this scam have not filed tax returns previously.

* Phishing. This is an attempt at identity theft. The unsuspecting person receives an e-mail claiming to be from the IRS, but it actually is linked to a fake IRS website meant to solicit a taxpayer's personal information, such as Social Security numbers. The con artist then uses the information to file for a fraudulent refund.

* Zero return. Fraudulent promoters instruct taxpayers to enter all zeros on their Federal income tax filings. Naturally, these returns are not valid. If a preparer tells you to do this, report him or her immediately.

* Trust misuse. Unscrupulous tax scheme promoters urge taxpayers to use offshore trusts to hide assets. Taxpayers should be very cautious and seek the advice of a reliable professional.

* Frivolous arguments. Under this scam, various constitutional arguments claim that filing and paying taxes is voluntary. The fraudulent promoter will allege that the Sixteenth Amendment--concerning Congressional power to lay and collect income taxes--never was ratified, implying that the IRS lacks authority to collect taxes. This is absolutely untrue.

* Return preparer fraud. This includes preparing and filing false income tax returns by preparers who inflate personal or business expenses, make false deductions, include excessive exemptions, and apply credits that are not allowed. Taxpayers are responsible for accurate tax returns, so be wary of preparers who promise big refunds.

* Credit counseling agencies. Reputable credit counseling agencies can advise you in regard to managing money and debts, but taxpayers should use caution when soliciting the help of credit counseling organizations. They may claim to fix credit ratings, but agencies that push debt payment agreements or charge high amounts for their services potentially could add to existing debt.

* Abuse of charitable organizations and deductions. A taxpayer may try to move assets or income to a tax-exempt organization, but maintain control over the income or assets.

* Offshore transactions. The IRS aggressively pursues those who try to avoid U.S. taxes by illegally hiding income in offshore banks and brokerage accounts or use offshore credit cards, wire transfers, foreign trusts, and employee leasing schemes to hide money.

* Employment tax evasion. Some scam artists encourage employers not to withhold Federal or other income taxes. This is based on an incorrect interpretation of the related tax code and repeatedly has been proven false in court.

* No gain deduction. Some tax filers try to eliminate their entire adjusted gross income by deducting it on Schedule A with the words "No Gain Realized." This deduction has no basis in law, so if you are confronted with this, take heed.