IRS has its own version of ‘Dirty Dozen’ abuses

Filed under: Banking & Finance |

It’s tax season, and that also means it’s tax-scam season.

The Internal Revenue Service has issued the 2006 “Dirty Dozen” – its latest tally of some of the most notorious tax scams.

In recent months, IRS personnel have noted the emergence of two new scams – “zero wages” and “Form 843 tax abatement.” In both cases, filers use IRS forms to claim that their tax bills have been wrongly inflated.

Involvement with any tax scam usually leads to prison time, according to the IRS.

Zero wages

In this scam, new to the Dirty Dozen, a taxpayer attaches to his or her return either a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 that shows zero or minimal wages or other income. The taxpayer may include a statement indicating that the taxpayer is rebutting information submitted to the IRS by the employer.

Form 843 tax abatement

This scam, also new to the Dirty Dozen, relies on a faulty interpretation of the Internal Revenue Code. It involves the filer requesting abatement of previously assessed tax using Form 843. Many people 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.”


Phishing is a technique used by identity thieves who steal personal financial data to access the financial accounts of unsuspecting consumers. They then run up charges on their credit cards or apply for new loans in the stolen names.

Zero return

Promoters instruct taxpayers to enter all zeros on their federal income tax filings. In a twist on this scheme, filers enter zero income, report their withholding and then write “nunc pro tunc” – Latin for “now for then” – on the return. They often also do this with amended returns hoping the IRS will disregard the original return in which they reported wages and other income.

Trust misuse

For years, con artists 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, and the IRS is actively examining these arrangements.

Frivolous arguments

Promoters have been known to make the following outlandish claims: the 16th Amendment, which addresses congressional power to claim and collect income taxes, was never ratified; wages are not income; filing a return and paying taxes are voluntary; and the requirement to file Form 1040 violates the Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy.

Return preparer fraud

Dishonest preparers can charge exorbitant amounts to file income tax returns or skim a portion of their clients’ refunds. During fiscal year 2005, 110 preparers were convicted of fraud.

Credit counseling agencies

The IRS is warning taxpayers about credit counseling organizations that claim they can fix credit ratings, push debt payment plans or impose high set-up fees or monthly service charges that may add to existing debt. The IRS is in the process of revoking the tax-exempt status of numerous counseling organizations that operate under the guise of educating financially distressed consumers with debt problems, while charging debtors large fees and providing little or no counseling.

Abuse of charitable organizations and deductions

The IRS has noticed increased use of donations to tax-exempt organizations to improperly shield income or assets from taxation.

Offshore transactions

Despite a crackdown by the IRS and state tax agencies, the IRS reports widespread attempts to avoid U.S. taxes by illegally hiding income in offshore bank and brokerage accounts or using offshore credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance.

Employment tax evasion

The IRS has seen a number of illegal schemes that instruct employers not to withhold federal income tax or other employment taxes from wages paid to their employees. The advice is based on an incorrect interpretation of Section 861, and has been refuted in court.

“No Gain” deduction

Filers attempt to eliminate their entire adjusted gross income by deducting it on Schedule A. The filer lists his or her AGI under the Schedule A section labeled “Other Miscellaneous Deductions” and attaches a statement to the return that refers to court documents and includes the words “No Gain Realized.”

CNB making Monument plans

Colorado National Bank has opened a loan production office in Monument. The bank’s senior vice president, David Harline, is managing the office.

Harline and CNB Regional President Bill Berenz are planning to open a full-service branch in Monument soon.

Rob Larimer covers banking and finance for the Colorado Springs Business Journal.