IRS Warns Of Tax Scams

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Deducting the entire amount of your wages and calling it "a necessary expense for the production of income" is one of the new tax scams the government has seen this year.

Taxpayers should steer clear of this and other tax scams, the Internal Revenue Service said Monday. The agency warned consumers that they might face fines and even prison time for participating in fraud or tax evasion.

"Don't be fooled by these outrageous claims," said IRS Commissioner Mark Everson. "There is no secret way to escape paying taxes."

A new scheme detected this year is the "claim of right" doctrine, a misinterpretation of tax law that sees taxpayers trying to deduct the entire amount of their wages.

It ranked second to the misuse of trusts promoted as a way to reduce income, gift or estate taxes. The IRS warned taxpayers that they won't see get these benefits from abusive trust arrangements. Numerous promoters and their clients have been criminally prosecuted.

Ten other scams made this year's list of questionable and illegal schemes that taxpayers should reject.

  • Religious corporation. A participant in this scam incorporates as the leader of a one-person, phony religious organization, then claims exemption from taxes as a nonprofit, religious organization. This scam twists rules intended for church leaders, and promoters sell it as a way to escape income taxes, child support and personal debts.
  • Offshore transactions. Offshore bank and brokerage accounts, credit cards, wire transfers and other arrangements used to avoid taxes ranked at the top of last year's list of scams. A special IRS amnesty netted more than $170 million in taxes, interest and penalties, but the IRS continues to see taxpayers trying to hide their income overseas.
  • Employment tax evasion. A number of illegal schemes instruct employers not to withhold federal income tax or employment taxes from wages paid to employees. Promoters have been convicted, and employees remain responsible for paying income taxes.
  • Return preparer fraud. Abusive return preparers sometimes divert a portion of a taxpayer's refund for their own benefit, charge inflated fees or advertise guaranteed larger refunds. Taxpayers should choose carefully because they are ultimately responsible for all information on their returns.
  • Americans with Disabilities Act. Using an incorrect interpretation of the Americans with Disabilities law, a promoter sells equipment and services that it claims meet strict criteria of the disabled access credit. The credit is not allowed in a fraudulent transaction.
  • African-American reparations. Thousands of African-Americans have been misled by people offering to file for tax credits or refunds related to slavery reparations. There is no such thing. Although the claims have fallen considerably, the IRS continues to see some.
  • Improper home businesses. Promoters claim individuals can deduct most or all of their personal and business expenses by setting up a bogus home-based business. Tax laws require home businesses to meet strict requirements with a profit motive.
  • Frivolous arguments. Following the advice of promoters who say they will reveal their tax secrets or teach you avoid taxes can lead to civil or criminal penalties for taxpayers.
  • Identity theft. Beware of identity thieves who pose as banks or IRS officials and ask for personal data. Choose your tax advisers carefully.
  • Shared or borrowed children. Unscrupulous tax preparers sometimes lend one client's children to another client for purposes of claiming a larger earned income tax credit, a tax benefit intended to raise low-income families out of poverty. The IRS prosecutes those preparers, and taxpayers may be subject to penalties.

    Taxpayers who suspect fraud can report it to the IRS at 1-800-829-0433.