2. The National Research Program focused especially on returns for:
a. Large corporations whose underpayments have the highest dollar value
b. Low-income individuals more likely to participate in the “under- ground economy”
c. Sole proprietors filing Schedule C
d. None of the above was the focus
3. What segment of business was subject to the least audit scrutiny in 2003, according to the Treasury Inspector General for Tax Administration?
a. S corporations
b. Large C corporations
c. Limited liability companies
d. Family limited partnerships
4. The TIGTA cited the continuing decline in revenue agents as feeding a “long-standing human capital crisis” in the IRS. True or False?
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¶710 TAX SCAMS
The focus of IRS enforcement runs to gamut, from the ultra-sophisticated tax shelter to the flim-flam tax scams that promise the “less-sophisticated” similar riches. In both instances, the underlying characteristic is fraud.
Taxpayers are always on the lookout for ways to minimize their tax liabilities. Lurking in the shadows of legitimate tax practitioners are a host of unscrupulous promoters and tax preparers. A small percentage of taxpayers will believe anything a promoter tells them to justify eliminating their tax bills.
Whereas some taxpayers actively seek out scam artists, others taxpayers run into them accidentally. Many are taxpayers who want to complete their returns but are attracted by the promise of huge tax savings and refund checks. The offers are too enticing to refuse.
Scams that promise to eliminate taxes are too good to be true. Unfor- tunately, many taxpayers leave their common sense at home. In the end, everyone loses. Taxpayers sucked into these schemes not only have to pay the taxes they owe, but also have to pay interest and penalties. Promoters and practitioners risk not only being permanently barred from practicing but also fines and imprisonment.
.01 The Dirty Dozen
Tax scams are easy abuses for the IRS to detect. The IRS labels these tax scams as the “Dirty Dozen.”
The Dirty Dozen list for 2005 warns about some old yet still prevalent scams, such as:
Misuse of trusts; Frivolous arguments Return preparer fraud “Claim of Right” doctrine; Corporation Sole scams; and Offshore transactions.
A new addition to the IRS’s warning list is identity theft. The IRS has dis- covered that several identity theft scams are tax related. Many of these scams involve scammers pretending to be IRS examiners. A typical scam involves a request for the individual’s personal financial data. The IRS never uses e-mail to contact taxpayers about their accounts.
Identify theft also is perpetrated by tax preparers themselves. The IRS has become aware of several tax preparers who have simply misappropri- ated their clients’ personal information to file false tax returns without the clients’ knowledge.
The IRS has also noticed a considerable rise in the use of tax-exempt organizations to shield income or assets. The IRS is especially troubled by the contribution of historic façade easements to a tax-exempt conservation orga- nization. The typical donation often nets the taxpayer a sizeable deduction compared to the value of the property. In many cases, historic preservation laws already prohibit alteration of the home’s façade. The contribution to the organization is essentially a sham.
Tax-exempt credit counseling organizations that claim that they can fix credit ratings have also come under fire. Many of the credit counseling agencies charge high fees for little or no results.
Finally, the last two “schemes” to round off the “dirty dozen” are for the truly gullible because they are invariably picked up when returns are first scanned into the IRS computer system. Using a “no gain” deduction in one, filers attempt to eliminate their entire adjusted gross income by deducting it on Schedule A with the words, “No Gain Realized” included in the filing. In the last scheme, filers skip the “need” for taking a deduction altogether, placing zeros in all lines of the return.
.02 Some Enforcement Victories
In Washington State, the DOJ recently targeted a husband and wife team of promoters who the government accused of selling sham trusts and other shelters. The government alleged that the couple helped clients to create sham trusts to eliminate or reduce federal tax liability. In its complaint, the government sought a court order directing the couple to turn over the names, addresses, and telephone numbers of their clients.
In Georgia, a federal court issued an injunction halting a scheme sold over the Internet to customers in 41 states. The promoter claimed that his “Tax Buster” scheme would enable customers to avoid income taxes by “renouncing” their Social Security numbers and claiming to be “sovereign citizens.”
A federal court in Tennessee has permanently barred the owner of a tax preparation business from preparing income tax returns or claims for refund. Without her clients’ knowledge, the tax preparer either made up or vastly inflated itemized deductions. This inflated the preparer’s fees, which were linked to the tax refund on the return.
In North Carolina, a federal court issued a permanent injunction barring an individual from selling two tax fraud schemes. In one scheme, taxpayers transferred their assets to a “corporation sole” and falsely claimed it was a church. Under the “claim of right” scheme, customers claimed their wages were exempt from tax. The Justice Department launched lawsuits against promoters around the country involved in the same schemes.
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STUDY QUESTIONS
5. A new, tax-related scam becoming part of the Dirty Dozen is:
a. Return preparer fraud
b. Identity theft contacting taxpayers about IRS information via e-mail
c. Offshore transactions
d. All of the above are new entries to the Dirty Dozen
6. All of the following are enforcement victories against scam promoters described here except:
a. Renouncing taxpayers’ Social Security numbers and claiming to be sovereign citizens not subject to income tax
b. Overly inflated itemized deductions listed on claims by a tax pre- parer in Tennessee without clients’ knowledge
c. Transferring assets to a “corporation sole” billed as a church
d. All of the above are scams described here