THE COLOR OF MONEY
Tax-filing season brings out slew of illegal write-off plans

By Michelle Singletary

W ASHINGTON — What is it about paying taxes that makes people lose both their minds and their morals?

I ask the question because many of the people who lose their minds over the money they have to pay in taxes make the best victims of illegal tax schemes. And of course, some of them are people who know or suspect that the schemes are illegal, but they go for them anyway. The latter deserve what they get, which is often to be conned out of their money on top of ending up in trouble with the Internal Revenue Service.

So here we are going through another tax year and another crop of tax cons. This year, as it does every year during tax season, the IRS has issued its "Dirty Dozen" list of the top tax scams.

The list has the usual tried and truly-people-can't-be-that-gullible scams. Some of the schemes outlined by the IRS include the following:

Reparations tax credit. In this scheme, African Americans are targeted and told that they can get a large reparations refund to compensate for their ancestors being slaves. Promoters charged as much as $150 to help people prepare a return claiming a credit of as much as $40,000. As despicable as slavery was, there is no provision in tax law that allows for African Americans to get a special tax refund as a reparation.

Illegal home business deductions. If you want to deduct legitimate business expenses, it should be understood to people with principles that you have got to have a legitimate business. Nonetheless, promoters of this scam talk people into setting up a bogus home-based business so that they can deduct their personal expenses. "You can't just say you have a home business because you occasionally sell things at a flea market," said Michelle Lamishaw, an IRS spokeswoman. For example, Lamishaw said you can't take a deduction for lawn care, claiming your home-based business has to look good (it has been tried and denied). For more information on the business use of your home get IRS Publication 587 at www.irs.gov.

Misuse of the disabled access credit. There are many versions of this tax scam but under one scenario, promoters sell expensive coin-operated telephones to individual investors, who think they are getting a low-risk investment with a guaranteed annual return. (Sometimes they never even get the telephones.) In addition to the investment return, investors are told they can claim a disabled access credit of up to $5,000 on their individual tax return because the telephones have volume controls. In truth, this tax credit can only be taken by a legitimate business that has incurred expenses to comply with the Americans With Disabilities Act. An eligible expense, for example, might include removing a physical barrier that would prevent a business from being accessible to individuals with disabilities.

Illegal offshore tax shelters. This was the top tax scam in the 2003. The rich may have been doing this for decades, but Uncle Sam is aggressively going after people who use offshore accounts to hide income. Increasingly, promoters have been peddling this scam to middle-income folks, Lamishaw said. The fact is, using an offshore bank account, brokerage account, credit card, wire transfer or trust to hide or underreport income or to claim false deductions on a federal tax return is illegal, the IRS says in its Dirty Dozen release.

Those were the old scams.

This year, several new and improved cons topped the IRS Dirty Dozen list. They included:

Misuse of trusts. There are professional trust-pushers out there who promise to show people (for a price, of course) how to use trusts to illegally hide the true ownership of assets and income. They claim the trusts can be used to reduce income that is subject to tax and take deductions for personal expenses paid by the trust, among other things. Certainly, setting up a trust for estate planning purposes is not illegal. But establishing one to hide taxable income is. If you are going to set up a trust, I suggest you get IRS Publication 2193, which warns taxpayers against using bogus tax avoidance trusts.

Deducting all wages to avoid paying taxes. Promoters talk people into filing returns with a deduction equal to the entire amount of their wages. According to the IRS, promoters advise people to label this deduction as "a necessary expense for the production of income" or "compensation for personal services actually rendered." The justification for this claim is as crazy as the folks who try to get away with it.

Misuse of the "corporation sole" exemption. Only bona fide religious leaders such as bishops or parsons may use this exemption, which allows them to separate legally from the control and ownership of church assets. But promoters, charging fees up to $1,000 or more per person, tell people they too can avoid paying taxes by assigning their income to a corporation sole. Heaven help you if the IRS catches you doing this.

The IRS estimates the potential revenue loss from abusive tax schemes to be in the tens of billions of dollars annually. When you think about it, that money belongs to you and me. So, let's help catch tax cheats.

If you suspect or know an individual or business that is promoting schemes to help people avoid paying their fair share, call the IRS at (800) 829-0433. It's the agency's Criminal Investigation Hotline.