Every year, the IRS produces a "Dirty Dozen" List of tax schemes that it warns individuals and businesses to avoid. The timing of the release of this list is always right in the heart of tax season, which I am confident is not mere coincidence. The 2005 list was released today with several familiar warnings, and a couple of new scams. Here is the rundown according to me (check out the IRS site if you want the official explanations):
1. Trust Scams. How many years does this appear in the Dirty Dozen list before it gets its jersey retired? The reason trust abuse is so prevalent is because it purports to give an individual control over income and assets without - allegedly - having any tax responsibilities. Case law that refutes traditional trust scam strategies have been on the books for many years, and the IRS has been cracking down hard on abusers. Remember, just because the trust promoter and the trust documents may claim to grant special legal powers or some mysterious status that is out of the reach of the tax collector doesn't mean the IRS and the Tax Court agree.
2. Frivolous Arguments. friv.o.lous (frv-ls) adj. 1.Unworthy of serious attention; trivial: a frivolous novel. 2. Inappropriately silly: a frivolous purchase. I have never understood what people think they are going to accomplish by taking a "trivial" or "silly" argument to the Tax Court. I've never been before the Tax Court, and hope never to have that opportunity, but I picture them as a fairly serious bunch of people. Do they really think they can show up with the argument that the personal income tax was never properly ratified or some other nonsense? If that were true, even I have enough faith in the body of our nation's lawyers to think that somebody would have noticed it before now.
3. Return Preparer Fraud. A simple scan of the press releases issued by the US Department of Justice over the years shows that there are a lot of fly-by-night operators who try to scam both individuals and the IRS by hanging a shingle, processing tax returns with huge tax refunds, and splitting the refunds with the clients. The clients may foolishly believe that if a tax preparer has signed off on the return, then it must be correct. But in the real world, if it is your return, you are responsible.
4. Credit Counseling Agencies. We've all heard or seen the ads. "Non profit" companies, claiming to be working for innocent consumers who are over burdened by debt, work to negotiate with all your creditors to reduce your payments and clear up your credit. Maybe somewhere there are legitimate companies who do that, but the IRS recognizes that most of them are scams that just soak desperate debtors with needless fees. These supposedly non profit companies throw a lot of cash into the pockets of their officers and organizers, which is an abuse of the federal non profit designation.
5. "Claim of Right" Doctrine. I don't know how it got this name, but it probably comes from IRS regulations. In a nutshell, this scam would have taxpayers take a deduction for the entire amount of their income, with the claim that it was all a write-off for the cost of producing the income in the first place. I've seen my dog chase his tail just the same way, and he can never catch it, either.
6. "No Gain" Deduction. This is a variation on the "Claim of Right" theme, just using different tax schedules to create the deductions against all the income, resulting in "no gain", and thus no tax.
7. Corporation Sole. This scam is the inevitable by-product of the start-your-own-church-and-take-religious-deductions scam that started 20 years ago in Southern California. By forming a corporation sole - which has specific use for religious organizations to hold assets - people try to claim that their income is tax exempt.
8. Identity Theft. Apparently the IRS is seeing a lot of attempts by scam artists to phish personal info and Social Security numbers by posing as tax auditors or financial institutions providing personal tax information.
9. Abuse of Charitable Organizations. Don't use a non profit company to hide personal assets or income. No kidding.
10. Offshore Transactions. Another Hall of Fame entry on the Dirty Dozen list.
11. Zero Return Scam. This one is kind of funny to me. Evidently just by putting all zeros on your tax return and writing in Latin on the bottom of it, people thought they could avoid taxes. Why didn't I think of that?
12. Employment Tax Evasion. Some people believe you don't have to withhold employment taxes. I remember getting an angry letter several years ago from a reader of The Nevada Corporation Handbook, criticizing my section on how to set up payroll with the argument that payroll tax withholding wasn't required. My response to him was essentially, "Don't be an idiot, and please don't write me again."
