The IRS annually publishes a list of popular tax scams that it is prosecuting. The list for 2003 was released in late February and includes a number of familiar topics. When it comes to taxes, you should always remember that if it looks too good to be true, it probably is.The IRS annually publishes a list of popular tax scams that it is prosecuting. The list for 2003 was released in late February and includes a number of familiar topics. When it comes to taxes, you should always remember that if it looks too good to be true, it probably is. While a cliché, this statement is usually a good guideline to follow with taxes.

Following is the IRS Scam List as well as short commentaries by the Agency:

1. Offshore Transactions

Some people use offshore transactions to avoid paying United States income tax. Use of an offshore credit card, trust or other arrangement to hide or underreport income or to claim false deductions on a federal tax return is illegal.

2. Identity Theft

Identity thieves use someone’s personal data to steal his or her financial accounts, run up charges on the victim’s existing credit cards, apply for new loans, credit cards, services or benefits in the victim’s name and even file fraudulent tax returns.

The IRS is aware of at least two recent identity theft scams involving taxes or the IRS. In one, tax preparers allegedly used information, such as Social Security numbers and financial information, from their clients’ tax returns to commit identity theft. In another, fraudsters sent bank customers fictitious bank correspondence and IRS forms in an attempt to trick them into disclosing their personal and banking data.

3. 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 con artists 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.

4. African-Americans Get a Special Tax Refund

Thousands of African-Americans have been misled by people offering to file for tax credits or refunds related to reparations for slavery. There is no such provision in the tax law. Some unscrupulous promoters have encouraged clients to pay them to prepare a claim for this refund. But the claims are a waste of money. Promoters of reparations tax schemes have been convicted and imprisoned. And taxpayers could face a $500 penalty for filing such claims if they do not withdraw the claim.

5. No Taxes Withheld From Wages

Illegal schemes are being promoted that instruct 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.

6. Improper Home-Based Business

This scheme purports to offer tax “relief” but in reality is illegal tax avoidance. The promoters of this scheme claim that individual taxpayers can deduct most, or all, of their personal expenses as business expenses by setting up a bogus home-based business. But the tax code firmly establishes that a clear business purpose and profit motive must exist in order to generate and claim allowable business expenses.

7. Pay the Tax, Then Get the Prize

The caller says you’ve won a prize, and all you have to do to get it is to pay the income tax due. Don’t believe it. Someone who really wins a prize may need to make an estimated tax payment to cover the taxes that will be due at the end of the year. But the payment goes to the IRS – not the caller. Whether the prize is cash, a car or a trip, a legitimate prize giver generally sends both the winner and the IRS a Form 1099 showing the total prize value that should be reported on the winner’s tax return.

8. Frivolous Arguments

Frivolous arguments are false arguments that are unsupported by law. When a scheme promoter says “I don’t pay taxes – why should you?” or urges you to “untax yourself for $49.95,” beware. These scams are as old as snake oil, but people continue to be taken in. And now they’re on the Internet. The ads may say that paying taxes is “voluntary,” but that’s just plain wrong. The U.S. courts have continuously rejected this and other frivolous arguments. Unfortunately, hundreds of people across the country have paid for the “secret” of not paying taxes or have bought “untax packages.” Then they find out that following the advice contained in them can result in civil and/or criminal penalties. Numerous sellers of the bogus schemes have been convicted on criminal tax charges.

9. Social Security Tax Scheme

Taxpayers shouldn’t fall victim to a scam offering refunds of the Social Security taxes they have paid during their lifetimes. The scam works by the victim paying a “paperwork” fee of $100, plus a percentage of any refund received, to file a refund claim with the IRS. This hoax fleeces the victims for the up-front fee. The law does not allow such a refund of Social Security taxes paid. The IRS processing centers are alert to this hoax and have been stopping the false claims.

10. “I Can Get You a Big Refund… for a Fee!”

Refund scheme operators may approach someone wanting to “borrow” their Social Security number or give him or her a phony W-2 so it appears that the person qualifies for a big refund. They may promise to split the refund with that person, but the IRS catches most of these false refund claims before they go out. And when one does go out, the participant usually ends up paying back the refund along with stiff penalties and interest.

11. Share/Borrow EITC Dependents

Unscrupulous tax preparers “share” one client’s qualifying children with another client in order to allow both clients to claim the Earned Income Tax Credit. For example, one client may have four children but only needs to list two to get the maximum EITC. The preparer will list two children on the first client’s return and the other two on another client’s tax return. The preparer and the client “selling” the dependents split a fee. The IRS prosecutes the preparers of such fraudulent claims, and participating taxpayers could be subject to civil penalties.

12. IRS “Agent” Comes To Your House To Collect

First, do not let anyone into your home unless they identify themselves to your satisfaction. IRS special agents, field auditors and collection officers carry picture IDs and will normally try to contact you before they visit. If you think the person on your doorstep is an impostor, lock your door and call the local police.

As you can see, a number of these scams are ridiculously obvious while others are less so. The inclusion of Offshore Transactions is not as simple as it seems. Certain offshore strategies are perfectly legal, but many are not. I will be writing further articles on this subject, but you should be aware that the IRS is aggressively targeting the offshore industry. A number of promoters in the industry have been indicted and arrested for promoting tax evasion. That is a subject for another day.

The IRS is aggressively pursuing and prosecuting individuals promoting the scams listed above. Importantly, the IRS is also pursuing and prosecuting taxpayers that use these scams to evade paying taxes. Prosecutions for fraud and tax evasion are typical. If the IRS successfully prosecutes, the defendants can be required to pay penalties, fines, back taxes and interest as well as potentially spending time in jail.

Adult-oriented companies are strongly advised to review tax strategies with an attorney or CPA prior to moving forward with the planning. If you have been taken in by any of the listed scams, you should contact a CPA and attorney immediately.

The above discussion is intended to be a general commentary on tax issues. Each situation is different and this article is not intended as legal advice for your specific situation. Further, nothing in this article is intended to create an attorney-client relationship.

Richard is also a moderator on the Legal Chat Board at YNOTMASTERS.

The IRS annually publishes a list of popular tax scams that it is prosecuting. The list for 2003 was released in late February and includes a number of familiar topics. When it comes to taxes, you should always remember that if it looks too good to be true, it probably is.The IRS annually publishes a list of popular tax scams that it is prosecuting. The list for 2003 was released in late February and includes a number of familiar topics. When it comes to taxes, you should always remember that if it looks too good to be true, it probably is. While a cliché, this statement is usually a good guideline to follow with taxes.

Following is the IRS Scam List as well as short commentaries by the Agency:

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