Posted on: Sunday, March 21, 2004

Filers beware: The IRS knows of these scams

By Sandra Block
USA Today

Tax preparers who say they can wipe out your tax bill by exploiting hidden loopholes are usually con artists. And if the IRS uncovers the scam, you'll be liable for back taxes, interest and penalties, says Dale Hart, head of the small business/self-employed division of the IRS.

Every year, the Internal Revenue Service releases a list of the most common tax-evasion scams. Here's a look at what's on the IRS' radar this year:

• Abusive trusts.

Promoters of these schemes urge small-business owners and other taxpayers to transfer cars, homes and other assets into trusts so they can claim personal expenses as business deductions. Promoters also use trusts to hide income and assets from the IRS, Hart says.

• "Claim of right" doctrine.

Purveyors of this scam contend you can deduct all your wages and label them as a "necessary expense for the production of income" or "compensation for personal services actually rendered."

The dodge is an illegal interpretation of a legitimate deduction for taxpayers who are required to forfeit income that has already been taxed.

• Corporation Sole.

Promoters say you can avoid federal income taxes, child support and other financial responsibilities by transforming yourself into a one-person religious organization. The scheme twists a legitimate provision known as Corporation Sole, which allows religious leaders to incorporate so they can separate themselves from the control and ownership of church assets.

• Offshore transactions.

Tax preparers help clients hide income and assets outside the United States, using offshore bank and brokerage accounts, credit cards, trusts and leases.

This was the top scam last year, and the IRS is aggressively tracking those involved.

• Employment tax.

Promoters tell employers they needn't withhold federal income or other employment taxes from employees' wages. The schemes are based on an incorrect interpretation of the law that has been rejected by the courts, the IRS says.

Employers who attempt this dodge could be held liable for back payments of employment taxes, plus penalties and interest. And workers who haven't had their taxes withheld are still responsible for paying their taxes.

• Tax preparer fraud.

Unscrupulous tax preparers may pocket part of their clients' income, charge inflated fees or advertise guaranteed refunds.

• Home-based businesses.

In this tax-avoidance scheme, promoters help clients manufacture deductions by setting up phony home-based businesses.

The tax code includes firm guidelines about what constitutes a business, the IRS says.