Personal Finance > Taxes

Dirty dozen tax scams
Here are some tax "strategies" you don't want to consider using this season. Why? They're illegal.
April 9, 2004: 3:01 PM EDT
By Sarah Max, CNN/Money staff writer

BEND, Ore. (CNN/Money) - Some people will do just about anything to lower their tax bill or avoid paying taxes altogether.

They "hire" children to do household chores, claim to be "bishops" of phony religious organizations, stash their cash in offshore accounts and try to hide behind the First, Fourth and Fifth Amendments, arguing it's their constitutional right to not pay taxes.

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Unfortunately, otherwise law-abiding citizens also get suckered into believing various scams that promise to relieve their tax burdens for a fee, of course. It's not just grannies being targeted either. In many cases, taxpayers with six-figure incomes are the victims of questionable, even downright wrong, advice.

"No self-respecting tax practitioner would sign on to any of these," said Mark Luscombe, principal analyst for CCH Incorporated.

Although the Internal Revenue Service's database of tax schemes seems almost as long as the tax code itself (well, not quite), it has identified the "dirty dozen" tax scams on the top of its watch list this year.

Indeed, here are 12 tax moves you most certainly don't want to consider this tax season.

Misuse a trust: If you're considering transferring your assets into a trust with the sole purpose of reducing your taxes, think again. The IRS said it is actively examining the misuse of trust arrangements. Its advice to individuals interested in setting up a trust: speak with a "trusted" tax professional.

Deduct all of your income: This scheme, also know as the "claim of right" doctrine, is based on a complete misinterpretation of the tax code, said the IRS. Tax evaders simply take a deduction equal to their income by labeling it a necessary expense for the production of income or compensation for person services actually rendered. Complicated? No. Illegal? Absolutely.

Start a phony church: Legitimate religious leaders sometimes use Corporation Sole statutes to legally separate themselves from their churches. But scam artists preach a different strategy at $1,000 seminars. Pose as a bishop or overseer of a fake religious organization, they say, and you'll be absolved of taxes, child support and other debts.

Export your money: This was the top scam last year, according to the IRS. For a fee, hucksters will help you set up a bank account overseas. By depositing your money in tax-haven territories, such as the Bahamas or Cayman Islands, you'll be able to hide some of your income from Uncle Sam, they say. Because you draw down money using a high-limit credit card or debit card, you don't need to worry about merchants, who are required to report cash transactions over $10,000 to the IRS.

It's a perfect plan, until you consider that the IRS has been able to obtain records for credit cards issued by offshore banks.

Don't withhold taxes: This scheme instructs people to tell their employers not to withhold a single penny of taxes on their behalf. Yeah right. Even if employers actually grant the request, employees are still obligated to pay taxes.

Let a con artist do your taxes: Be wary of any tax preparer whose advertisements promise larger refunds. Abusive preparers charge higher fees and deliver on their promise of larger refunds by taking liberties with the tax code.

Abuse the Americans with Disabilities Act: Companies that purport to sell wheelchair ramps and other accessibility equipment "sell" tax evaders goods and service that they can use to claim the Disabled Access Credit. Buyers pay a minimal amount for a fake receipt.

Claim slavery reparation: After the Civil War, Congress passed a bill to allow slavery reparations of 40 acres and a mule. That bill was vetoed by Andrew Johnson and never enacted into law. Yet con artists have convinced tens of thousands of African-Americans that they are eligible for tax credits or refunds for slavery reparation. The IRS now sends warning letters to taxpayers who claim such reparations and will give them a chance to remove the claims from their returns. Those who don't correct their returns face a $500 fine for filing a frivolous claim.

Set up a bogus home-based business: Promoters of these schemes say you can deduct most of your personal expenses as a business expense even if you don't have an actual business.

Fall for frivolous arguments for not paying taxes: There is a laundry list of arguments that have been dreamed up by people protesting taxes, who for a few will explain why it's your First, Fourth or Fifth Amendment right to not pay taxes.

Lose your identity: The IRS said there are several scams that use taxes or the IRS to steal people's identity, including one where fraudulent tax preparers steal Social Security numbers to file false returns.

Share or borrow children: Don't have any kids? Have more kids than you need to claim the maximum Earned Income Tax Credit? For a fee, huckster tax preparers will broker a deal in which families with a lot of kids sell their children's Social Security numbers to individuals with no children to claim on their returns.  Top of page

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