Sacramento CPA, Tax, Accounting, Bookkeeping
Tax Scams to Avoid
If a tax scam to avoid paying taxes seems too good to be true, it probably is too good to be true. There’s no magic trick that can eliminate an individual or business tax obligation. Taxpayers need to be wary of these tax scams.
Tax scams are illegal and can lead to significant tax penalties, interest, and possible criminal prosecution for the taxpayer.
The IRS lists several common schemes to avoid:
Phishing
Phishing is a scheme used by internet-based scam artists to trick people into revealing personal and financial information about them. The information is used by the scam artists to steal the taxpayer’s identity, access bank accounts, use credit cards, or apply for loans. This is done in the form of an email that appears to come from a reputable source, including the IRS. The IRS never elicits unsolicited correspondence with taxpayers about tax issues. The taxpayer should forward these emails to phising@irs.gov.
Hiding Taxable Income Offshore
Taxpayers have tried to avoid paying income tax by hiding money in offshore banks or brokerage accounts. Taxpayers also use offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, and private annuities or life insurance plans. The IRS draws a line between taxpayers who voluntarily come forward and those who fail to come forward.
Filing False or Misleading Tax Forms
Taxpayers have filed false or misleading tax returns to claim a tax refund that they are not entitled to. Information tax returns, such as 1099-Original Issue Discount (OID), are used to claim false withholding credits to legitimize tax refund claims.
Abuse of Charitable Organizations
Tax exempt organizations are organized to shield income or assets from taxation and donors try to maintain control over donated income or assets. The IRS investigates schemes regarding the donation of non-cash assets including easements on property, closely-held corporate stock and property. The donations are either overvalued or the charity promises the donor that he can purchase the donations back at another time.
Abusive Retirement Plans
The IRS has uncovered abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements. The IRS is looking for transactions where taxpayers are avoiding the limitations on contributions and transactions that aren’t reported as early distributions that could create tax penalties. Taxpayers should steer clear of advisers who want to shift appreciated assets into IRAs at less than their fair market value to avoid annual contribution limits.
Zero Wages
An illegal method that taxpayers have used to reduce the amount of tax owed is filing a fictitious wage or income related tax return to replace a legitimate tax return. Forms that have been filed to reduce taxable income to zero are a substitute form W-2 or a corrected form 1099.
Misuse of Trusts
Unscrupulous promoters have urged taxpayers to transfer their assets into trusts for a reduction of taxable income, deductions for expenses, and reduced estate or gift tax. This tax scheme is used to hide assets from the IRS and rarely deliver the tax benefits promised. Trust arrangements commonly entered into by taxpayers are private annuity trusts and foreign trusts.
Fuel Tax Credit Scams
Some taxpayers, such as farmers who use fuel for off highway business purposes, may be entitled to the fuel tax credit. Other taxpayers are falsely claiming the tax credit for nontaxable uses of fuel. This is considered a frivolous tax claim and could be subject to a $5,000 tax penalty.