The Internal Revenue Service identifies some of the most common tax scams affecting us and warned people not to fall for these schemes presented by scam artists. We in California are not immune to the kinds of predatory tactics described here. As a Los Angeles tax attorney, I can be an excellent target of an unscrupulous promoter. Those of you living in Santa Barbara County, Ventura County, and Orange County can be particularly targeted because the scam artist believes the prize is bigger.
We should remember we are ultimately responsible for what is on our tax return even if some unscrupulous preparers have steered us in the wrong direction. If you use a tax professional, pick someone who is reputable. It isn’t all that comforting to us who fall prey to scamster to know that tax return preparers and promoters of tax schemes risk significant penalties, interest and possible criminal prosecution.
The IRS urges us to avoid these common schemes:
Abusive Roth IRAs: We should be wary of advisers (both in California and elsewhere) who encourage us to shift under-valued property to Roth Individual Retirement Arrangements (IRAs). In one variation, a promoter has the taxpayer move under-valued common stock into a Roth IRA, circumventing the annual maximum contribution limit and allowing otherwise taxable income to go untaxed.
No Wages: This works by using a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 showing zero or little income which is submitted with a federal tax return. The taxpayer may include a statement rebutting wages and taxes reported by the payer to the IRS. An explanation on the Form 4852 may cite statutory language behind Internal Revenue Code sections 3401 and 3121 or may include some reference to the paying company refusing to issue a corrected Form W-2 for fear of IRS retaliation.
Disguised Ownership: Domestic shell corporations and other entities are being formed and operated in certain states for the purpose of disguising the ownership of the business or financial activity. Once created, these anonymous entities can be used to facilitate underreporting of income, non-filing of tax returns, listed transactions, money laundering, financial crimes and possibly terrorist financing.
Phishing is a technique used by identity thieves to obtain personal financial data to gain access to the financial accounts of innocent consumers like you and me, apply for loans in our names or run up charges on our credit cards. These Internet-based criminals pose as representatives of a financial institution –– or sometimes the IRS itself –– and send out emails to trick us into disclosing private information. A typical email notifies a taxpayer of an outstanding refund and urges the taxpayer to click on a link and visit an official-looking web site. The web site then solicits a social security and credit card number. Keep in mind that the IRS does not use e-mail to initiate contact with taxpayers about issues related to their accounts.
Return Preparer Fraud: Dishonest tax return preparers can be a serious problem for tax attorneys like me in Los Angeles who have to rectify errors created by these unscrupulous preparers. Such preparers make their money by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. By promising large refunds, they attract new clients. Some preparers promote filing fraudulent claims for refunds on items such as fuel tax credits to recover taxes paid in prior years.
Telephone Excise Tax Refund Abuses: Some individual taxpayers have requested large and improper amounts for the special telephone tax refund. Some taxpayers seem to be requesting a refund of the entire amount of their phone bills, rather than just the 3% tax on long-distance and bundled service to which they are entitled. Some tax preparers are helping their clients file these improper requests.
Trust Misuse: Promoters have urged taxpayers to transfer assets into trusts for some time now. They promise a reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. However, some trusts do not deliver the promised tax benefits. There are currently more than 150 active abusive trust investigations currently going on and 49 injunctions have been obtained against promoters since 2001. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust.
Structured Entity Credits: In this scam, promoters are setting up partnerships to own and sell state conservation easement credits, federal rehabilitation credits and other credits. The purported credits are the only assets owned by the partnership and once the credits are fully used, we receive a K-1 indicating the initial investment is a total loss, which is then deducted on our individual income tax return. Forming such an entity is not a viable business purpose. In other words, the investments are not valid, and the losses are not deductible by us.
Abuse of Charitable Organizations and Deductions: This scam involves the use of tax-exempt organizations to shield income or assets from taxation in a manner not permitted by the tax law. This can occur when a taxpayer moves assets or income to a tax-exempt supporting organization or donor-advised fund but maintains control over the assets or income. Contributions of non-cash assets continue to be an area of abuse, especially with regard to overvaluation of contributed property. More and more often, the IRS is noticing the characterization of private tuition payments disguised as charitable contributions to religious organizations.
How to Report Suspected Tax Fraud Activity: Suspected tax fraud can be reported to the IRS using IRS Form 3949-A, Information Referral. The person filing the report is not required to self-identify, although it is helpful to do so. The identity of the person filing the report can be kept confidential. The person may also be entitled to a reward.
Speak to a California tax lawyer about this or other tax problems.