the IRS Website
unveils 2005 Tax Scams
IR-2005-19, Feb. 28, 2005
The Internal Revenue Service today unveiled its annual
listing of notorious tax scams, the Dirty Dozen,
reminding taxpayers to be wary of schemes that promise to eliminate
taxes or otherwise sound too good to be true.
Dirty Dozen for 2005 includes several new scams
that either manipulate laws governing charitable groups, abuse
credit counseling services or rely on refuted arguments to claim
tax exemptions. The agency also sees the continuing spread of
identity theft schemes preying on people through e-mail, the
Internet or the phone, sometimes with con artists posing as
representatives of the IRS.
Dirty Dozen is a reminder that tax scams can take many forms,
IRS Commissioner Mark W. Everson said. Dont be fooled
by false promises peddled by scam artists. Theyll take
your money and leave you with a hefty tax bill.
with tax schemes can lead to imprisonment and fines. The IRS
routinely pursues and shuts down promoters of these scams. But
taxpayers should also remember that anyone pulled into these
schemes can face repayment of taxes plus interest and penalties.
who suspect tax fraud can call the IRS at 1-800-829-0433.
The IRS urges people to avoid these common schemes:
Misuse. Unscrupulous promoters for years 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. More than two dozen injunctions have been obtained
against promoters since 2001, and numerous promoters and their
clients have been prosecuted. As with other arrangements, taxpayers
should seek the advice of a trusted professional before entering
into a trust.
Frivolous Arguments. Promoters have been known to make the following
outlandish claims: that the Sixteenth Amendment concerning congressional
power to lay and collect income taxes was never ratified; that
wages are not income; that filing a return and paying taxes
are merely voluntary; and that being required to file Form 1040
violates the Fifth Amendment right against self-incrimination
or the Fourth Amendment right to privacy. Dont believe
these or other similar claims. Such arguments are false and
have been thrown out of court. While taxpayers have the right
to contest their tax liabilities in court, no one has the right
to disobey the law.
Return Preparer Fraud. Dishonest return preparers can cause
many headaches for taxpayers who fall victim to their ploys.
Such 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. Taxpayers should choose carefully when hiring
a tax preparer. As the saying goes, if it sounds too good to
be true, it probably is. No matter who prepares the return,
the taxpayer is ultimately responsible for its accuracy. Since
2002, the courts have issued injunctions ordering dozens of
individuals to cease preparing returns, and the Department of
Justice has filed complaints against dozens of others, which
are pending in court.
Credit Counseling Agencies. Taxpayers should be careful with
credit counseling organizations that claim they can fix credit
ratings, push debt payment agreements or charge high fees, monthly
service charges or mandatory contributions that
may add to debt. The IRS Tax Exempt and Government Entities
Division has made auditing credit counseling organizations a
priority because some of these tax-exempt organizations, which
are intended to provide education to low-income customers with
debt problems, are charging debtors large fees, while providing
little or no counseling.
"Claim of Right" Doctrine. In this scheme, a taxpayer
files a return and attempts to take a deduction equal to the
entire amount of his or her wages. The promoter advises the
taxpayer to label the deduction as a necessary expense
for the production of income or compensation for
personal services actually rendered. This so-called deduction
is based on a misinterpretation of the Internal Revenue Code
and has no basis in law.
No Gain Deduction. Similar to Claim of Right,
filers attempt to eliminate their entire adjusted gross income
(AGI) 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, referring
to court documents and including the words No Gain Realized.
Corporation Sole. Since September 2004, the Department of Justice
has obtained six injunctions against promoters of this scheme
and filed complaints against 11 others. Participants apply for
incorporation under the pretext of being a bishop
or overseer of a one-person, phony religious organization
or society with the idea that this entitles the individual to
exemption from federal income taxes as a nonprofit, religious
organization. When used as intended, Corporation Sole statutes
enable religious leaders to separate themselves legally from
the control and ownership of church assets. But the rules have
been twisted at seminars where taxpayers are charged fees of
$1,000 or more and incorrectly told that Corporation Sole laws
provide a legal way to escape paying federal income
taxes, child support and other personal debts.
Identity Theft. It pays to be choosy when it comes to disclosing
personal information. Identity thieves have used stolen personal
data to access financial accounts, run up charges on credit
cards and apply for new loans. The IRS is aware of several identity
theft scams involving taxes. In one case, fraudsters sent bank
customers fictitious correspondence and IRS forms in an attempt
to trick them into disclosing their personal financial data.
In another, abusive tax preparers used clients Social
Security numbers and other information to file false tax returns
without the clients knowledge. Sometimes scammers pose
as the IRS itself. Last year the IRS shut down a scheme in which
perpetrators used e-mail to announce to unsuspecting taxpayers
that they were under audit and could set matters
right by divulging sensitive financial information on an official-looking
Web site. Taxpayers should note the IRS does not use e-mail
to contact them about issues related to their accounts. If taxpayers
have any doubt whether a contact from the IRS is authentic,
they can call 1-800-829-1040 to confirm it.
Abuse of Charitable Organizations and Deductions. The IRS has
observed an increase in the use of tax-exempt organizations
to improperly shield income or assets from taxation. This can
occur, for example, when a taxpayer moves assets or income to
a tax-exempt supporting organization or donor-advised fund but
maintains control over the assets or income, thereby obtaining
a tax deduction without transferring a commensurate benefit
to charity. A contribution of a historic facade
easement to a tax-exempt conservation organization is another
example. In many cases, local historic preservation laws already
prohibit alteration of the homes facade, making the contributed
easement superfluous. Even if the facade could be altered, the
deduction claimed for the easement contribution may far exceed
the easements impact on the value of the property.
Offshore Transactions. Despite a crackdown on the practice by
the IRS and state tax agencies, individuals continue to 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 to do so. The IRS, along with the
tax agencies of U.S. states and possessions, continues to aggressively
pursue taxpayers and promoters involved in such abusive transactions.
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 thenon the return.
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.
Such advice is based on an incorrect interpretation of Section
861 and other parts of the tax law and has been refuted in court.
Recent cases have resulted in criminal convictions, and the
courts have issued injunctions against more than a dozen persons
ordering them to stop promoting the scheme. Employer participants
can also be held responsible for back payments of employment
taxes, plus penalties and interest. It is worth noting that
employees who have nothing withheld from their wages are still
responsible for payment of their personal taxes.