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Published August 2006

Consumers: Be wary
of ‘Dirty Dozen’ tax scams

As tax advisers, we do our best to help people pay the least amount of tax allowed under the law. But some unscrupulous types push the envelope too far. Every year, the U.S. Internal Revenue Service issues its “Dirty Dozen” list of tax scams that promise to reduce or eliminate taxes. Don’t be fooled by these false promises, or you could be left with a hefty tax bill plus penalties.

Zero wages. In this scam, a taxpayer attaches to his or her return either a Form 4852 (Substitute Form W-2) or a corrected Form 1099 that shows zero or little wages or other income.

Form 843 Tax Abatement. This scam involves the filer requesting abatement of previously assessed tax using Form 843. Many using this scam have not previously filed tax returns. The tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program.

Phishing. This is an identity theft scam rather than a tax reduction or elimination scheme. Scam artists posing as IRS agents send out bogus e-mails to taxpayers, hoping that they will disclose their personal financial information. The IRS never contacts taxpayers by e-mail.

Zero returns. Returns with all zeros are not valid.

Trust misuse. Promoters have urged taxpayers to transfer assets into trusts to reduce taxes. Trusts cannot shield all assets from taxation.

Frivolous arguments. These include various bogus constitutional arguments and false claims that filing and paying taxes is voluntary.

Return preparer fraud. If it sounds too good to be true, it probably is. Shop for a return preparer carefully. Whether he’s right or wrong, you are ultimately responsible for the accuracy of your own returns.

Credit counseling agencies. Beware of credit counseling agencies that claim they can “fix” credit ratings or charge high fees to do nothing.

Abuse of charitable organizations and deductions. The IRS has observed increased use of tax-exempt organizations to improperly shield income or assets from taxation. This occurs when the amount of a tax deduction is not commensurate with the benefit to the charity.

Offshore transactions. Internet banking and ease of travel have made moving assets offshore to evade taxation easier than ever. The IRS is aware of scams encouraging taxpayers to hide income in offshore accounts and foreign trusts.

No-gain deduction. Under this scheme, filers attempt to eliminate their entire adjusted gross income by deducting it on Schedule A with the words “No Gain Realized” included in the filing. This has no basis in law.

Employment tax evasion. These schemes range from using frivolous arguments to “hiding” employees through fraudulent lease and other contractor-type arrangements.

The IRS routinely pursues and shuts down promoters of tax scams. However, anyone pulled into one of these scams can face repayment of tax plus interest and penalties. If you receive a solicitation of this kind, consider reporting it to the IRS or getting a second opinion from a CPA before taking any action. Comments or questions? Please e-mail me at maryd@hascal.com.

Mary Decker is a CPA, Certified Financial Planner and a principal of Hascal Sjoholm & Co., a full-service CPA firm in Everett. She specializes in tax and estate planning. She can be reached online at www.hascal.com or at 425-252-3173.

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© 2006 The Daily Herald Co., Everett, WA