As the saying goes, if it sounds too good to be true, it usually is. That's the case with scams that seem to show up around tax-filing season. Here are some of the biggies to look out for this year.
Phony tax payment checks. In this scheme, con artists sell fictitious financial instruments that look like checks to pay a tax liability, mortgage, and other debts. The swindlers may also counsel their clients to use a phony check to overpay their taxes so they can receive a refund from the IRS for the overpayment. The false checks, called sight drafts, are worthless and have no financial value. It is illegal to use these sight drafts to pay a tax liability or other debts.
African-American reparation tax refund. Thousands of African-Americans have been scammed by tax preparers offering, for a fee, to file for tax credits or refunds related to reparations for slavery. Quite simply, there is no such provision in the tax law. By the time the victim realizes that no refund is forthcoming, the scammer is long gone. To add insult to injury, filing a false claim can cause the victim to be assessed a $500 civil penalty.
Home-based business deductions. This scheme offers tax "relief," but is really nothing more than illegal tax evasion. The promoters claim that an individual can deduct virtually all of their personal expenses as business expenses by setting up a bogus home-based business. However, such a practice is illegal. The tax code clearly states that a business must be genuine, with a clear purpose and profit motive, before any business expenses are deductible.
Even if you do have a legitimate business, personal expenses, such as household expenses, are not deductible. In fact, this scam has become so popular that the IRS has created an information pamphlet warning taxpayers.
No taxes withheld from wages. Some ne'er-do-wells have been instructing employers not to withhold federal income tax or employment taxes from wages paid to their employees. These schemes are based on an incorrect interpretation of tax law and have been refuted in court. A recent flurry of court actions has been taken against promoters of these schemes. Taxpayers who have concerns about their employer and employment taxes can get help by calling the IRS at 1-800-829-1040.
Taxes are voluntary -- and I volunteer not to pay. This scam has many faces, from promoters showing you (for a fee, of course) that you don't have to have any taxes withheld from your wages, to a promoter charging a fee to share this little known "secret," to purchasing an "untax package" that shows you how you can avoid paying any taxes. Many of these scams are showing up with more and more regularity on the Internet.
Don't be taken in! The courts have continuously rejected these and various other similar schemes. The advice contained in these packages can result in civil and/or criminal penalties.
No taxes in a trust. The perpetrators of these abusive trust schemes charge a substantial fee (many thousands of dollars) for trust packages that look nice and pretty, not to mention official and legal. Part of the fee charged is to allow the taxpayer to use various foreign trustees, bank accounts, and corporations within the trust documents. The taxpayer is then advised to transfer his assets to these trusts and corporations, with the promise that he will never again be subject to taxes.
Many folks have been advised to use ATM or credit cards issued by foreign banks, with the understanding that anything paid with these cards can be called a business deduction, regardless if the purchase is for a legitimate business purpose or (most likely) a non-deductible personal reason. This scam is particularly dangerous since it's being promoted by professionals that provide official-looking documents.
These promoters go on to explain that because of the separation of responsibility and control between the taxpayer and these trusts and corporations, no income ever accrues to the taxpayer. Since there is no control, there are no income taxes.
Sadly, once the IRS uncovers all of the facts and circumstances surrounding the trust documents, it becomes clear that the taxpayer controls all of these trusts and corporations, either directly or indirectly. Therefore, the claim that the taxpayer can avoid income taxes just doesn't hold up. The IRS is investigating many of these abusive trusts, trying to nail not only the promoters but also the taxpayers involved. Don't be either of them.
IRS "agent" visiting to collect. You may find somebody knocking at your door who claims to be an IRS agent collecting back taxes. He'll try to scare you into writing a check on the spot. Don't do it.
In fact, don't let anybody into your home that purports to be an IRS agent without seeing proper documentation. IRS field auditors, collection officers, and special agents all carry picture IDs. Additionally, IRS officials who have legitimate business with you will normally call before they pay a visit. If you think that the person on your doorstep is an impostor, lock your door and immediately call your local police. Then make your next call to the Treasury Inspector General's Hotline at 1-800-366-4484.
If you're on the receiving end of one of these scams, contact the Treasury Inspector General for Tax Administration by calling the toll-free fraud referral hotline at 1-800-366-4484, faxing a complaint to 202-927-7018, or writing to the TIGTA Hotline, P.O. Box 589, Ben Franklin Station, Washington, D.C. 20044-0589. Additionally, if you suspect tax fraud in any transaction, report it to the IRS at 1-800-829-0433. Finally, if you're looking for tips and hints regarding legal tax issues, visit The Motley Fool Tax Center.
Roy Lewis lives in a trailer down by the river and is a motivational speaker when not dealing with tax issues and he understands that The Motley Fool is all about investors writing for investors. You can take a look at the stocks he owns as long as you promise not to ask him which stock to buy. He'll be glad to help you compute your gain or loss when you finally sell a stock, though.