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IRS
warns: watch out for these "dirty dozen" tax scams
When
it comes to tax-saving promises, the Internal Revenue Service says taxpayers
would be wise to remember the recurring warning from television's X-Files: Trust
no one.
Each
year, the IRS sees con artists emerge with schemes designed to separate
taxpayers from their cash. Believing promises to cut tax bills, scam victims end
up losing cash. Compounding their financial misery, they subsequently find
themselves in hot water with the IRS.
Most
of the schemes are patently false. A couple take real tax breaks, or portions of
legal write-offs, and illegally apply them. Rip-offs range from phony prizes to
"untaxing" secrets to promised tax savings for older, disabled and
ethnic filers. Some folks can't even trust their bosses, with work-related scams
gaining in popularity.
Here
are 12 common, and potentially costly, cons the IRS is alert to. You should be,
too.
Not withholding taxes
from your paycheck
Illegal
schemes arguing that employers don't have to withhold federal income tax or
employment taxes from employees' wages are showing up with increasing frequency.
These scams rely on an interpretation of tax law that wages are not a
"source" of income and that the definition of "sources of
income" does not apply to individuals.
This
is wrong, says the IRS, and federal courts have agreed with the tax agency,
rejecting these arguments as frivolous and imposing penalties on tax evaders.
"The
law is crystal clear that income and employment taxes must be paid," said
Joe Kehoe, Commissioner of the IRS Small Business and Self-Employed Division.
"Evading employment taxes can have serious consequences. Employers may be
subject to criminal and civil sanctions for willfully failing to pay employment
taxes."
Tax-law
violating employers have been sentenced to either federal prison, a halfway
house, home detention or some incarceration combination on employment tax
issues. The convicted tax evaders also were ordered to make restitution to the
government for the unpaid taxes. And the IRS is ramping up such investigations.
While
employers may see jail time, workers also could face tax consequences.
Individuals still are ultimately responsible for personal tax payments --
income, Social Security and Medicare -- even when a boss refuses to withhold
them. If these taxes aren't withheld regularly from paychecks, a taxpayer could
face a huge tax bill in April, plus penalties and interest for not paying
throughout the year as income was earned.
The
IRS urges persons concerned about an employer and employment taxes to call the
agency toll-free at (800) 829-1040.
"I
don't pay taxes. Why should you?"
In
these cases, con artists boast about how they don't file or pay taxes. They're
happy to share their "secret" -- for a fee. The real secret, says the
IRS, is that many of these scammers actually file and pay taxes. They just won't
publicly admit it.
Failure
to file or pay taxes is illegal. If you fall for this con, you could be out the
price of the fake tax-saving secret and also face civil and criminal tax
penalties.
Special
refund for African-Americans
Thousands
of African-Americans have been misled by people offering to file for tax credits
or refunds related to reparations for slavery.
This
scam has a distant factual basis. Shortly after the Civil War, Congress voted to
provide former slaves with 40 acres and a mule as payback for their years in
slavery. President Andrew Johnson vetoed the bill. Though politicians and
various media discuss the reparations issue for descendants periodically, there
currently is no tax law that allows for any slavery-related tax breaks.
Some
unscrupulous promoters encourage clients to pay them to prepare a claim for this
invalid refund. But the claims are a waste of money. Plus, those who file
subsequent claims can be subject to a $500 frivolous return penalty.
Social
Security tax scheme
Older
people are the target of many illegal schemes, and it's no different when it
comes to tax scams.
A
recurring swindle is an offer to refund to individuals the Social Security taxes
they have paid during their lifetimes. The con artist convinces the victim to
pay a "paperwork" fee, usually $100 plus a percentage of any refund
received, to file a claim with the IRS.
There
is no law allowing for refund of Social Security taxes. So this hoax fleeces the
victims for the upfront fee and leaves them waiting for a nonexistent refund.
IRS processing centers nationwide are on to this scam and immediately stop the
false claims.
Pay
the tax, then get the prize
Everybody
wants to be a winner, and tax scammers use this desire to their advantage in the
fake prize ploy.
In
this scheme, a caller congratulates you on winning a prize. All you have to do
to get it is pay the income tax due. The tip-off that this is not on the level
is that the requested tax payment is to be made payable to the caller.
While
taxes are due on prizes (including cash, merchandise or trips), don't believe
these unexpected bearers of "good" news. Any taxes on prizes would be
paid to the IRS, usually through filing estimated taxes, not the caller. Plus,
reputable prize givers will send you and the IRS a Form 1099 showing the total
prize value that should be reported on your tax return.
"Untax"
yourself -- for just $49.95
This
scam is as old as snake oil, but people continue to be taken in. And now the
phony tax ride is being offered on the Internet.
These
"untax" ads generally say that paying taxes is voluntary. This, warns
the IRS, is absolutely wrong. Courts have continuously rejected this and similar
arguments. Unfortunately, hundreds of people across the country still buy "untax
packages" -- the going rate is around $50 -- before discovering that the
advice could cost them civil and criminal tax penalties on top of the scam
price.
The
IRS says numerous sellers of these bogus packages have been convicted on
criminal tax charges.
"I can get you a
big refund (for a fee)"
In this
cousin to the untaxing scam, con artists approach you and want to
"borrow" your Social Security number for use on a phony W-2 that makes
it look like you qualify for a big refund.
The
scheme operators may promise to split the refund with you. The IRS, however,
catches most of these false refund claims before they go out. And when one gets
out, the agency says the recipient doesn't get to keep the money for long. When
the illegal refund is discovered, the scam participant usually ends up paying
back the money along with stiff penalties and interest.
"Trust me. Never
pay taxes again."
Trusts
are a legitimate and frequently used financial and estate planning tool. In
legitimate trust arrangements, a taxpayer no longer manages his or her income
and assets. Instead, the money is controlled by an independent trustee. But the
urge to cut taxes too often makes people easy marks for self-styled tax experts
who say they can eliminate taxes through illegal trust investments.
The
IRS says sellers of abusive trust schemes are charging from $5,000 to $70,000
for improperly prepared trust packages. The trust promoters ostensibly use the
fee to prepare trust documents, set up foreign and domestic trustees and invest
taxpayer assets in foreign bank accounts and corporations. But, federal
investigators warn, in many of these cases the taxpayer continues to control and
direct his or her assets, making the arrangement an illegal trust -- and
worthless from a tax-saving perspective.
Sharing tax-credit
dependents
The
earned income credit offers lower-income workers a way to save on taxes. The tax
break is bigger for taxpayers who are supporting children. To get the maximum
credit, a filer need only claim two children as dependents. Unscrupulous tax
preparers sometimes "borrow" one client's "extra" kids and
transfer them to another filer's return to illegally manufacture this tax break.
For example, Joe has four youngsters. His preparer properly lists two of Joe's
children to claim the full earned income tax credit. However, Joe's other two
kids are listed on the childless Jane's return to illegally get her the same tax
saving.
Often,
reports the IRS, the preparer convinces clients to participate in the bogus
claim by offering to split the tax refund money generated by the illegal claim.
The tax pro could face criminal charges, and civil penalties could be assessed
the taxpayers.
Improper home-based
business
Lots of
people run their own business from home, either as a main job or to supplement
wage income. Such ventures also can provide several tax-saving deductions. But
to meet IRS muster when claiming such breaks, the home-based business must be
legitimate. Don't necessarily believe -- or pay -- promoters of work-at-home
plans that purport to make all our personal expenses tax deductible. Tax laws
clearly state that a business must have a clear business purpose and profit
motive before the operator can claim business expenses.
Phone break for the
disabled
In this
scam, con artists sell expensive coin-operated pay telephones, contending the
buyers can claim a $5,000 Disabled Access Credit on their tax returns because
the phones have volume controls. The tax credit is real, but it is limited to
legitimate businesses that are installing the machines to comply with the
Americans with Disabilities Act.
Unexpected
IRS home visits
Particularly brazen con artists make personal visits to their marks' homes.
Posing as federal tax agents, the scam operators try to collect what they say is
additional tax owed by the resident.
Don't
let any unknown person come into your home until they have identified themselves
to your satisfaction. The IRS says its special agents, field auditors and
collection officers carry photo identification cards. But even before they show
up, the feds usually try to contact you to arrange a convenient meeting time.
Unexpected IRS visits should immediately raise questions about the legitimacy of
the "agent."
In
these cases, as with any unknown visitor, if you think the person is an
imposter, lock your door and call the local police. To report IRS impostors,
call the Treasury Inspector General's toll-free hotline at (800) 366-4484.
IRS
offices across the country are well aware of these dirty dozen tax scams. If you
encounter any of them, or are approached with a new one, the agency wants to
know. Report suspected tax fraud by calling the IRS toll-free at (800) 829-0433.
And
it never hurts to be a little skeptical. If something sounds too good to be
true, especially at tax time, it probably is.
DebtFREEGuru.Com Tip of the Week for Monday, January 20, 2003
Copyright 2003 DebtFREEGuru.Com All Rights Reserved.
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John S. Moore has been facilitating financial planning, cash management, investment and personal growth workshops throughout the United States for more than twenty years.
In hundreds of workshops over the past 8 years, John has taught thousands of people how to live a debt-free, stress-free lifestyle. He teaches primarily at Unity, Religious Science and Science of Mind churches, as well as other churches, schools and corporations around the United States.