Taxpayers should avoid falling prey to Dirty Dozen

Filed under: Banking & Finance |

The Internal Revenue Service has announced the 2006 Dirty Dozen, its annual tally of notorious tax scams, along with an alert to taxpayers to watch out for schemes that promise to reduce or eliminate taxes.

“When it comes to taxes, everyone has to pay their fair share,” said IRS Commissioner Mark W. Everson. “I urge taxpayers not to be taken in by hucksters who promise to lower or eliminate taxes. Getting caught up in the Dirty Dozen or similar schemes can lead to big headaches.”

Namely, involvement can lead to imprisonment and fines. The IRS urges people to avoid these common schemes:

  • Zero Wages. In this scam, 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 little wages or other income. The taxpayer may include a statement indicating the taxpayer is rebutting information submitted to the IRS by an employer. An explanation on Form 4852 may cite “statutory language behind IRC 3401 and 3121” or may include some reference to the paying company refusing to issue a corrected Form W-2 for fear or IRS retaliation. The Form 4582 or 1099 is usually attached to a “Zero Return.”
  • 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 through the Substitute for Return Program. The filer uses Form 843 to list reasons for the request.
  • Phishing. Phishing is a technique used by identity thieves to acquire personal financial data via the Internet in order to gain access to the financial accounts of unsuspecting consumers, run up charges on their credit cards or apply for new loans in their names. These criminals pose as representatives of a financial institution or the IRS and send fictitious e-mail correspondence in an attempt to trick consumers into disclosing private information. A typical e-mail notifies a taxpayer about an outstanding refund and urges the taxpayer to click on a hyperlink and visit an official looking Web site.
  • Zero Return. Promoters instruct taxpayers to enter all zeros on their federal income tax filings. In a twist on the scheme, filers enter zero income, report their withholding and then write “nunc pro tunc” — Latin for “now for then” — on the return.
  • Trust Misuse. Promoters have urged taxpayers to transfer assets into trusts with the promise of reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes.
  • Frivolous Arguments. Promoters have been known to make the following claims: the 16th 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.
  • Return Preparer Fraud. Some dishonest preparers derive financial gain by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds.
  • Credit Counseling Agencies. Be careful with credit counseling organizations that claim they can fix credit ratings, promote debt payment plans or impose high set-up fees or monthly service charges that may add to existing debt.
  • Abuse of Charitable Organizations and Deductions. The IRS has observed increased 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 of income, thereby obtaining a tax deduction without transferring a commensurate benefit to charity.
  • Offshore transactions. Some individuals try 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 policies.
  • Employment Tax Evasion. Some illegal schemes instruct employers not to withhold federal income tax or other employment taxes from wages paid to their employees because of an incorrect interpretation of Section 861 and other parts of the tax law.
  • No gain deductions. 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.”

Paying promptly pays off

Discover Financial Services has launched the Motiva Card, a credit card that gives consumers cash rewards for good credit management.

The Discover Motiva Card is designed for consumers who carry a balance and often feel underappreciated by card companies rather than rewarded for being some of their best customers. They believe current rewards programs focus on the biggest spenders and therefore don’t meet their needs.

Each time card members make on-time monthly payments six times in a row, they receive their next month’s interest back as a pay-on-time bonus, in addition to the cash-back bonus card members earn on all purchases.

Lorna Gutierrez covers banking and finance for the Colorado Springs Business Journal.