Fraudulent Telephone Tax Refunds, Abusive Roth
IRAs Top Off 2007 “Dirty Dozen” Tax Scams
WASHINGTON –– The Internal Revenue Service today identified
12 of the most blatant scams affecting American taxpayers and
warned people not to fall for schemes peddled by scamsters.
This year the “Dirty Dozen” highlights
five new scams that IRS auditors and criminal investigators have
uncovered. Topping off the list are fraudulent refunds being claimed
in connection with the special Telephone Excise Tax Refund available
to most taxpayers this filing season. The IRS is actively investigating
instances of this scam involving tax preparers who are preparing
inflated refund requests.
Also new to the Dirty Dozen this year are abuses
pertaining to Roth IRAs, the American Indian Employment Credit,
domestic shell corporations and structured entities.
“Taxpayers shouldn’t let their guard
down,” IRS Commissioner Mark W. Everson said. “Don’t
get taken by scam artists making outrageous promises. If you use
a tax professional, pick someone who is reputable. Taxpayers should
remember they are ultimately responsible for what is on their
tax return even if some unscrupulous preparers have steered them
in the wrong direction.”
Involvement in tax schemes leads to problems
for scam artists and taxpayers. Tax return preparers and promoters
risk significant penalties, interest and possible criminal prosecution.
The IRS urges taxpayers to avoid these common
schemes:
1. Telephone Excise Tax Refund Abuses: Early
filings show some individual taxpayers have requested large and
apparently improper amounts for the special telephone tax refund.
In some cases, taxpayers appear to be requesting a refund of the
entire amount of their phone bills, rather than just the three-percent
tax on long-distance and bundled service to which they are entitled.
Some tax preparers are helping their clients file apparently improper
requests. The IRS is investigating potential abuses in this area
and will take prompt action against taxpayers who claim improper
refund amounts and against the return preparers who help them.
2. Abusive Roth IRAs: Taxpayers should be wary
of advisers who encourage them to shift under-valued property
to Roth Individual Retirement Arrangements (IRAs). In one variation,
a promoter has the taxpayer move under-valued common stock into
a Roth IRA, circumventing the annual maximum contribution limit
and allowing otherwise taxable income to go untaxed.
3. Phishing is a technique used by identity thieves
to acquire personal financial data in order to gain access to
the financial accounts of unsuspecting consumers, run up charges
on their credit cards or apply for loans in their names. These
Internet-based criminals pose as representatives of a financial
institution –– or sometimes the IRS itself ––
and send out fictitious e-mail correspondence in an attempt to
trick consumers into disclosing private information. A typical
e-mail notifies a taxpayer of an outstanding refund and urges
the taxpayer to click on a hyperlink and visit an official-looking
Web site. The Web site then solicits a social security and credit
card number. It is important to note the IRS does not use e-mail
to initiate contact with taxpayers about issues related to their
accounts. If a taxpayer has any doubt whether a contact from the
IRS is authentic, the taxpayer should call 1-800-829-1040 to confirm
it.
4. Disguised Corporate Ownership: Domestic shell
corporations and other entities are being formed and operated
in certain states for the purpose of disguising the ownership
of the business or financial activity. Once formed, these anonymous
entities can be, and are being, used to facilitate underreporting
of income, non-filing of tax returns, listed transactions, money
laundering, financial crimes and possibly terrorist financing.
The IRS is working with state authorities to identify these entities
and to bring their owners into compliance.
5. Zero Wages: In this scam, which first appeared
in the Dirty Dozen in 2006, a Form 4852 (Substitute Form W-2)
or a “corrected” Form 1099 showing zero or little income
is submitted with a federal tax return. The taxpayer may include
a statement rebutting wages and taxes reported by the payer to
the IRS. An explanation on the Form 4852 may cite statutory language
behind Internal Revenue Code sections 3401 and 3121 or may include
some reference to the paying company refusing to issue a corrected
Form W-2 for fear of IRS retaliation.
6. Return Preparer Fraud: Dishonest return preparers
can cause many headaches for taxpayers who fall victim to their
schemes. Such preparers make their money by skimming a portion
of their clients’ refunds and charging inflated fees for
return preparation services. They attract new clients by promising
large refunds. Some preparers promote filing fraudulent claims
for refunds on items such as fuel tax credits to recover taxes
paid in prior years. Taxpayers should choose carefully when hiring
a tax preparer. As the old saying goes, “If it sounds too
good to be true, it probably is.” Remember that no matter
who prepares the return, the taxpayer is ultimately responsible
for its accuracy. Since 2002, the courts have issued injunctions
ordering dozens of individuals to cease preparing returns, and
the Department of Justice has filed complaints against dozens
of others. During fiscal year 2006, 109 tax return preparers were
convicted of tax crimes and sentenced to an average of 18 months
in prison.
7. American Indian Employment Credit: Taxpayers
submit returns and claims reducing taxable income by substantial
amounts citing an American Indian employment or treaty credit.
Although there is an Indian Employment Credit available for businesses
that employ Native Americans or their spouses, there is no provision
for its use by employees. In a somewhat similar scam, unscrupulous
promoters have informed Native Americans that they are not subject
to federal income taxation. The promoters solicit individual Indians
to file Form W-8 BEN seeking relief from all withholding of federal
taxation. A recent “phishing” variation has promoters
using false IRS letterheads to solicit personal financial information
that they claim the IRS needs in order to process their "non-tax"
status.
8. Trust Misuse: For years unscrupulous promoters
have urged taxpayers to transfer assets into trusts. They promise
reduction of income subject to tax, deductions for personal expenses
and reduced estate or gift taxes. However, some trusts do not
deliver the promised tax benefits. There are currently more than
150 active abusive trust investigations underway and 49 injunctions
have been obtained against promoters since 2001. As with other
arrangements, taxpayers should seek the advice of a trusted professional
before entering into a trust.
9. Structured Entity Credits: Promoters of this
newly identified scheme are setting up partnerships to own and
sell state conservation easement credits, federal rehabilitation
credits and other credits. The purported credits are the only
assets owned by the partnership and once the credits are fully
used, an investor receives a K-1 indicating the initial investment
is a total loss, which is then deducted on the investor’s
individual tax return. Forming such an entity is not a viable
business purpose. In other words, the investments are not valid,
and the losses are not deductible.
10. Abuse of Charitable Organizations and Deductions:
The IRS continues to observe the use of tax-exempt organizations
to improperly shield income or assets from taxation. This can
occur when a taxpayer moves assets or income to a tax-exempt supporting
organization or donor-advised fund but maintains control over
the assets or income. Contributions of non-cash assets continue
to be an area of abuse, especially with regard to overvaluation
of contributed property. In addition, the IRS is noticing the
return of private tuition payments being disguised as charitable
contributions to religious organizations.
11. Form 843 Tax Abatement: This scam rests on
faulty interpretation of the Internal Revenue Code. It involves
the filer requesting abatement of previously assessed tax using
Form 843. Many using this scam have not previously filed tax returns
and the tax they are trying to have abated has been assessed by
the IRS through the Substitute for Return Program. The filer uses
the Form 843 to list reasons for the request. Often, one of the
reasons is: "Failed to properly compute and/or calculate
IRC Sec 83-Property Transferred in Connection with Performance
of Service."
12. Frivolous Arguments: Promoters have been
known to make the following outlandish claims: the Sixteenth Amendment
concerning congressional power to lay and collect income taxes
was never ratified; wages are not income; filing a return and
paying taxes are merely voluntary; and being required to file
Form 1040 violates the Fifth Amendment right against self-incrimination
or the Fourth Amendment right to privacy. Don’t believe these
or other similar claims. 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.
IRS Still Watches Scams That Fall Off the List
Five of last year’s Dirty Dozen tax scams
rotated off the list for 2007. While the IRS has seen a decline
in the occurrence of some of these scams –– abusive
credit counseling agencies, for example –– other problems,
such as offshore abusive transactions continue to be an area of
particular concern for the agency. The absence of a particular
scheme from the Dirty Dozen should not be taken as an indication
that the IRS is unaware of it or not taking steps to counter it.
How to Report Suspected Tax Fraud Activity
Suspected tax fraud can be reported to the IRS
using IRS Form 3949-A, Information Referral. Form 3949-A is available
for download from the IRS Web site at IRS.gov, or by mail by calling
1-800-829-3676. The completed form or a letter detailing the alleged
fraudulent activity should be addressed to the Internal Revenue
Service, Fresno, CA 93888. The mailing should include specific
information about who is being reported, the activity being reported,
how the activity became known, when the alleged violation took
place, the amount of money involved and any other information
that might be helpful in an investigation. The person filing the
report is not required to self-identify, although it is helpful
to do so. The identity of the person filing the report can be
kept confidential. The person may also be entitled to a reward.
