The “Dirty Dozen” – Part III: Scams 8-12

May 06, 2014 by Carol Thompson, EA
Piggy bank with handcuffs hanging on it

Continuing on with Scams 8-12, let’s look at the third set of scams in The Dirty Dozen.

  1. False Income, Expenses or Exemptions: Another set of scams that cost taxpayers billions each year include filing returns with inflated income, expenses, or exemptions. These include:
  • A common ploy is to falsify W-2’s with large amounts of withholding and get a refund before the W-2 is verified.
  • Another is claiming additional non-existent income to reach the maximum Earned Income Credit.
  • Taxpayers are claiming the Fuel Tax Credit without owning an off-road commercial vehicle. Note that this is considered a “frivolous” tax claim with a penalty of $5,000.
  • Another common scheme is to “sell” exemption credits to others. An unscrupulous preparer may pay a fee to one taxpayer to “borrow” children for another return to maximize the Earned Income Credit for both taxpayers. This scam has resulted in prison sentences for as high as 20+ years. Is it worth it?
  1. Frivolous Arguments. Frivolous schemes make unreasonable and outlandish claims to avoid paying taxes. The promoters of these schemes are subject to fines and even prison. The taxpayers may face criminal prosecution, including felonies, for tax evasion, fraud, erroneous refund claims, or failure to file penalties. Some risk criminal prosecution and prison time. The IRS has a list of tax arguments thrown out by the courts, including the Supreme Court.

  2. Claiming Zero Wages or Using False Form 1099. Taxpayers are counseled to use Form 4852, Substitute Form W-2, or a “corrected” Form 1099 to reduce taxable income to zero. These fraudulent forms can be purchased online (don’t get any ideas!!).
  • Some taxpayers submit a statement rebutting wages and taxes reported by an employer.
  • Some file statements that their W-2 is incorrect and the filer refuses to correct it for fear of retribution by the IRS.
  • There are even refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayer can gain access to the accounts by issuing 1099-OID forms. (Original Issue Discount)
  • Perpetrators and users of these scams are subject to the $5,000 frivolous penalties, penalties for civil tax fraud, tax evasion, and more, and can face jail time, as well as restitution of all phony refunds paid.
    “When it sounds too good to be true, it usually is.”
    These are words to live by.
  1. Abusive Tax Structures: These include everything from fictitious partnerships and corporations to foreign trusts, offshore accounts, and other flow-through entities. The Criminal Investigation (CI) unit is focused on identifying and investigating both the entities and the investors. Be aware when you sign the dotted line on any multi-user investment. Check out the company before you invest!

  2. Misuse of Trusts: This has been on the list of abusive transactions from the beginning. Unscrupulous promoters urge taxpayers to transfer assets into trusts. Then the trusts are used to move money and assets from one to the next to the next. This type of trust is another form of tax evasion particularly aimed at transferring “wealth” to avoid estate taxes. Some of the trust setups promise that the taxpayer will not pay any income taxes because the trusts shift the burden away from the taxpayer. As with all the other scams, check it out before you sign any paperwork.


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