Topping the Tax Scam List

The Internal Revenue Service recently issued its 2008 "Dirty Dozen" list: the 12 most egregious tax schemes and scams, nine of which affect or are often perpetrated by business owners. Here are those that small business owners should be on the lookout for:

1. Phishing—Phishing is a tactic used by web-based thieves to trick unsuspecting victims into revealing personal information that they can then use to access the victims' financial accounts. These criminals use the information obtained to empty victims' bank accounts, run up credit card charges and apply for loans or credit in their names. Phishing scams often take the form of an email that appears to come from a legitimate source. Some scam emails falsely claim to come from the IRS. To date, taxpayers have forwarded more than 33,000 of these scam emails, reflecting more than 1,500 different schemes, to the IRS. The IRS never uses email to contact taxpayers about their tax issues. Taxpayers who receive unsolicited email that claims to be from the IRS can forward the message to a special electronic mailbox, phishing@irs.gov, using instructions contained in an article titled "Protect Yourself from and Report Suspicious emails or Phishing Schemes."

2. Fuel tax credit scams—The IRS is receiving claims for the fuel tax credit that are unreasonable. Some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit was recently added to the list of frivolous tax claims, potentially subjecting those who improperly claim the credit to a $5,000 penalty.

3. Hiding income offshore—Individuals continue to try to avoid paying U.S. taxes by illegally hiding income in offshore bank and brokerage accounts or using offshore debit cards, credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance plans. The IRS and state tax agencies continue to aggressively pursue taxpayers and promoters involved in such abusive transactions.

4. Abusive retirement plans—The IRS continues to uncover retirement plan abuses, including transactions that taxpayers are using to avoid the limitations on contributions to Roth IRAs. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into Roth IRAs or companies owned by their Roth IRAs at less than fair market value. In one variation of the scheme, a promoter has the taxpayer move a highly appreciated asset into a Roth IRA at cost value, which is below annual contribution limits, even though the fair market value far exceeds the amount allowed.

5. Zero wages—Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a "corrected" Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS. Sometimes fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme.

6. False claims for refund and requests for abatement—This scam involves a request for abatement of previously assessed tax using Form 843 ("Claim for Refund and Request for Abatement"). Many individuals who try this have not previously filed tax returns. The tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program. The filer uses Form 843 to list reasons for the request. Often, one of the reasons given is "failed to properly compute and/or calculate Section 83-Property Transferred in Connection with Performance of Service."

7. Return preparer fraud—Dishonest tax return preparers can cause many problems for taxpayers who fall victim to their schemes. These scam artists make their money by skimming a portion of their clients' refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Some preparers promote the filing of fraudulent claims for refunds on items such as fuel tax credits to recover taxes paid in prior years. Taxpayers should choose carefully when hiring a tax preparer, especially one who promises something that seems too good to be true.

8. Disguised corporate ownership—Some people are going as far as forming domestic shell corporations in certain states for the purpose of disguising the ownership of a business or financial activity. Once formed, these anonymous entities can be used to facilitate underreporting of income, non-filing of tax returns, engaging in listed transactions, money laundering, financial crimes and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance.

9. Abuse of charitable organizations and deductions—The IRS continues to observe the misuse of tax-exempt organizations. Misuse includes arrangements to improperly shield income or assets from taxation, attempts by donors to maintain control over donated assets or income from donated property and overvaluation of contributed property. In addition, IRS examiners are seeing an upturn in instances where taxpayers try to disguise private tuition payments as contributions to charitable or religious organizations.