IRS Warns Of Common Tax Scams

That enticing tax deal is probably too good to be true, the Internal Revenue Service said Monday in a warning against scams that promise big refunds or tax savings.

Taxpayers can end up paying taxes due, plus interest and fines, for participating a dozen common schemes highlighted by the IRS.

"Don't be fooled by false promises peddled by scam artists," said the agency's commissioner, Mark Everson. "They'll take your money and leave you with a hefty tax bill."

The scams include identity theft, misused trusts and frivolous legal arguments. Anyone who suspects fraud can call the IRS toll-free at 1-800-829-0433. Among the examples are:

  • Abusive Trusts. Dishonest promoters promise that trusts can reduce income subject to tax, offer deductions for personal expenses and provide a way around estate and gift taxes. Some do not deliver these promised benefits.
  • Frivolous Arguments. The IRS rejects legal arguments such as those claiming that wages do not count as income, that filing a return and paying taxes is voluntary and that filing a return violates an individual's right against self-incrimination.
  • Fraudulent Preparers. Taxpayers should be wary of preparers who promise large refunds. Many profit by skimming a portion of the money. Taxpayers, not tax professionals, bear ultimate responsibility for the accuracy of tax returns.
  • Credit Counseling. Be wary of credit counseling organizations that charge high fees, push debt payment agreements or claim they can fix credit ratings. Some payment arrangements can add to debt. The IRS has many credit counseling organizations under audit.
  • "Claim of Right" Doctrine. A taxpayer tries to deduct an amount equal to his or her wages as a "necessary expense for the production of income" or "compensation for personal services actually rendered." The IRS says the deduction is illegal.
  • "No Gain" Deduction. Similar to a "Claim of Right," this scam sees a taxpayer deduct his income as a miscellaneous deduction and attaches a statement to claim "no gain realized." The IRS says this deduction is illegal.
  • Corporation Sole. Promoters urge taxpayers to misuse a tax law designed for church officials, telling them to establish a false, one-person religious organization or society to claim exemption from federal income taxes.
  • Identity Theft. Identity thieves have been known to send individuals fictitious IRS forms to get personal financial data or to use other people's Social Security numbers to file fraudulent tax returns. Taxpayers should be aware that the IRS does not contact individuals by e-mail. Be careful disclosing personal information.
  • Charitable Organizations and Deductions. The IRS has seen increasing use of tax-exempt organizations to hide income from taxation and more taxpayers misusing deductions for donated property.
  • Offshore Transactions. The IRS pursues individuals who try to avoid taxes by illegally hiding income offshore through banks, brokerages, credit cards, life insurance and other financial arrangements.
  • Zero Return. Promoters instruct taxpayers to enter zeros on every line in the tax return. In a more recent version, taxpayers claim no income but report taxes withheld and write "nunc pro tunc" - Latin for "now for then - on the return.
  • Employment Tax Evasion. A number of scams instruct employers not to withhold federal income or employment taxes from employees' wages. Employers can be held liable for taxes, penalties and interest. Employees who have nothing withheld from their paychecks still must pay taxes.

    By Mary Dalrymple