New York (CNN/Money) -
Some people will do just about anything to lower their tax bill or avoid paying taxes altogether.
They "hire" their children to do household chores, 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.
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.
Sprint chairman and chief executive William Esrey, for one, is being audited by the Internal Revenue Service and has been dismissed from his position at Sprint for trying to shelter his exercised options from taxes. In a letter to his employees, Esrey said that Ernst & Young had recommended he enter a "unique investment and tax strategy" that was evidently so unique Esrey had to sign a non-disclosure agreement.
While the IRS has yet to say whether or not the tax shelter used by Esrey is legitimate, the IRS seems to have very little tolerance for creative interpretations of the tax law.
"Always be skeptical if anyone tells you 'I've got the real inside story and nobody else knows about it but me, but you have to pay me,'" said Jackie Perlman, senior tax research analyst for H&R Block.
The Internal Revenue Service's database of tax schemes is almost as long as the tax code itself (well, not quite), but these three scams are particularly egregious:
Illegal tax havens
For a fee that can run in the thousands of dollars, 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. And 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, tattling to Internal Revenue Service.
But in 2000, the IRS began serving what's known as "John Doe" summonses to American Express, MasterCard and Visa in order to obtain the records for credit cards issued by banks in dozens of tax-haven countries.
At one point, the IRS estimated more than a million cardholders were using such accounts to hide taxable income. They've since said that duplicate accounts and legitimate accounts exaggerated the number but that it is still "substantial."
But before the IRS begins criminal procedures against such tax evaders, it's inviting them to come forward and fess up.
This January, the IRS launched the "offshore voluntary compliance initiative." Under the initiative, people stashing their money offshore for the wrong reasons have until April to come forward, give full details about the promoters and solicitors of these arrangements and, of course, pay back taxes, interest and penalties.
Failure to do so could result in jail time.
After the Civil War, Congress passed a bill to allow slavery reparations of 40 acres and a mule. That bill was vetoed by President 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. In 2001, the IRS received 80,000 returns with claims totaling more than $2.7 billion for reparation refunds. What's more, the IRS believes that other groups, such as Native Americans, have also become targets of similar scams.
Promoters can charge fees that can be either a percentage of the refund claimed or a flat fee of $50, $100 or higher.
"These people set up shops in malls and have very credible sounding materials. You pay them some kind of fee and they're gone. You can never get this fee money back," said Perlman.
As of April 2002, the IRS is sending 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.
A matter of rights
There is a laundry list of arguments that have been dreamed up by people protesting taxes. For example, some non-filers claim that filing a tax return violates their Fifth Amendment right against self-incrimination or your Fourth Amendment right to privacy. Others argue there is no taxable gain when you "exchange" labor for money or that the basis for income tax was never properly ratified under the Constitution. Yet another popular argument is that it's a First Amendment religious right to contribute more than 50 percent of your income (the maximum allowed by the IRS) to charity.
Scamsters promise to share these loopholes with "clients," again in exchange for a fee. According to the IRS, however, often times the people who purport these bogus arguments actually file and pay their own taxes.
"If you don't pay taxes you are breaking the law, and anyone who thinks taxes are voluntary is sadly mistaken," said Perlman.
Every year there are hundreds of examples of people who are punished dearly for not filing tax returns. In many of the more prominent cases, the defendants have been doctors, lawyers and even CPAs.
For example, in April of 2002 a Missouri attorney was sentenced to 36 months in federal prison for not filing taxes for three consecutive years. He argued there was not statutory requirement to file taxes, along with other "tax-protest" defenses. Needless to say, he lost.
"The courts have held that these arguments are spurious and without merit," said Anthony Burke, a spokesperson for the IRS. "No one has ever won a (tax protest) case."