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The Honolulu Advertiser
Posted on: Thursday, February 20, 2003

IRS warns of top 12 common tax scams

By Leigh Strope
Associated Press

 •  Tax fraud hot line

Anyone suspecting tax fraud can call the Internal Revenue Service at (800) 829-0433.

WASHINGTON — The IRS is urging taxpayers not to be taken in this tax season by a "dirty dozen" of common scams.

"With the tax season in full swing, we're seeing the traditional upswing in tax trickery," IRS Acting Commissioner Bob Wenzel said. "Year after year, con artists across the nation try pulling a fast one on honest taxpayers with different types of miracle tax solutions. Don't be fooled by the 'dirty dozen' and other misleading scams. There is no secret way to get out of paying taxes."

The IRS this week is announcing the 12 most common schemes:

Offshore transactions. Some people use offshore transactions to avoid paying U.S. income tax. Use of an offshore credit card, trust or other arrangement to hide or underreport income or to claim false deductions on a federal tax return is illegal. Through April 15, the IRS is offering limited amnesty to people involved in such arrangements.

People interested in participating in the program, called the Offshore Voluntary Compliance Initiative, may contact the IRS by calling (215) 516-3537.

Identity theft. In one scam, tax preparers allegedly used information, such as Social Security numbers and financial information, from their clients' tax returns to commit identity theft. In another, scammers sent bank customers fictitious bank correspondence and IRS forms in an attempt to trick them into disclosing personal information.

Phony tax payment checks. Con artists sell phony checks to pay a tax liability, mortgage or other debts. The false checks, called sight drafts, are worthless and have no financial value. Their use is illegal.

Slavery reparations. Thousands of black Americans have been misled by people offering to file for tax credits or refunds related to slavery reparations. There is no provision in the tax law for slavery reparations. Taxpayers could face a $500 penalty for filing such claims if they are not withdrawn.

Taxes not withheld from wages. Illegal schemes are being promoted that instruct employers not to withhold federal income tax or employment taxes from wages paid to employees. These schemes are based on an incorrect interpretation of tax law and have been refuted in court.

Improper home-based businesses. Promoters claim that taxpayers can deduct most, or all, of their personal expenses as business expenses by setting up a bogus home-based business. But the tax code firmly establishes that a clear business purpose and profit motive must exist to claim allowable business expenses.

Pay the tax and get a prize. The caller says you've won a prize, and all you have to do to get it is to pay the income tax due. Don't believe it. If a legitimate prize is received, the winner may need to make an estimated tax payment to cover the taxes that will be due at the end of the year. But the payment goes to the IRS, not the caller.

Frivolous arguments. Beware of promotions that claim all taxes can be avoided or that urge you to "untax yourself for $49.95." Such schemes are online and false.

Social Security tax scheme. A scam offers refunds of all Social Security taxes paid over a lifetime — which isn't legal. The scam works by getting the victim to pay a "paperwork fee" of $100, plus a percentage of any refund received.

Promises of a big refund for a fee. Victims are asked to lend their Social Security numbers or a W-2 form with promises of a portion of an unusually large return.

Share or borrow dependents. Tax preparers share a client's qualifying children with another client to allow both to claim the Earned Income Tax Credit. The preparer and the client "selling" the dependents split a fee. The IRS prosecutes the preparers of such fraudulent claims, and participating taxpayers could be subject to civil penalties.

IRS impersonators making house calls to collect taxes. IRS special agents, field auditors and collection officers carry picture IDs and will normally contact someone before a visit.