We recently reviewed how to recognize various scam artists that fraudulently steal taxpayers sensitive information and trick them into thinking they owe taxes.
Today we want to make you aware that there are a lot of schemes in which taxpayers try to rid themselves of their tax liability or are being tricked into doing so. The IRS is well aware of this and imposes serious charges against tax payers participating in these schemes or preparers defrauding the IRS to gain a taxpayers trust.
As a general rule always keep in mind “If it sounds too good to be true – it probably is!” We listed below the most common known schemes to the IRS and what to do if you involuntarily became a part of it.
- Anti-Tax Law Schemes
There are groups out there that have encouraged others NOT to comply with the law. Quite a few have unsuccessfully challenged the applicability of tax laws using a variety of arguments. These false arguments claim that there is no Internal Revenue Code that imposes taxes, that only “individuals” are required to pay taxes or that the government can assess taxes only against people who actually file returns. There even have been assertions that the sixteenth Amendment was not properly ratified and therefore the tax law was unconstitutional.
Whoever is in noncompliance with IRS regulations or a participant to it faces substantial prison sentences imposed by the courts as well as having to pay fines, taxes, civil penalties and frequently court costs.
The IRS has however recently focused its efforts to help otherwise innocent taxpayers, who have been misled by others, to rejoin the system.
- Abusive Offshore Tax Avoidance Schemes
U.S. persons are taxed in the U.S. on their worldwide income. Foreign persons, such as nonresident aliens and foreign corporations, are only taxed on income originating in the Unites States. As a result, some U.S. persons have structured their income earning activities through foreign entities, to take advantage of the different taxation between a U.S. person versus foreign person. “Expatriation” (the renunciation of one’s U.S. citizenship or resident status and establishment of permanent residence outside the U.S.) has been another method to avoid US tax.
In recent years, the IRS has noted a significant increase in offshore activity among U.S. taxpayers. Numerous schemes have been devised in which the true ownership of income streams and assets is hidden or disguised to improperly shield substantial amounts of financial activity from the U.S. tax system.
Such offshore transactions generally involve foreign jurisdictions (so called tax havens), which offer financial secrecy laws in an effort to attract investment from outside their borders. These schemes for example comprise offshore-deferred compensation arrangements, where a large portion of the business owner’s salary is deferred while he/she gains immediate access to the funds; overstated invoicing for goods and services or insurance arrangements by an offshore entity.
Whereas it is perfectly legitimate to form a foreign Corporation, Partnership or Trust for business purposes it should not be promoted as a means to divert income and conceal assets for taxpayers who are not operating a real business in that foreign country. And even though promoters of such offshore schemes rely on the difficulty of record accessing of these so called tax haven banks, the IRS is actively examining these types of arrangements and imposes civil and/or criminal penalties.
- Preparers of Fraudulent Returns
Filing returns with fake documents, such as a false form 1099’s or improperly reporting taxable income as “zero”, is on the “Dirty Dozen” list of tax scams for the 2015 filing season. The IRS warns that people should watch out for this type of scam, especially when someone else prepares their return to claim deductions or credits to which they are not entitled. Being a party to such schemes could make them liable for financial penalties or even criminal prosecution.
If you believe you have incorrectly filed, you should file an amended return. If the amended return results in additional tax owed, you may also be subject to interest and penalties. However, amending your return most likely reduces the amount of penalties and interest that you eventually owe.
You have the option to contact the Internal Revenue Service at 1-866-775-7474 or e-mail the Tax Shelter Hotline at firstname.lastname@example.org
Finally, if you know of a tax fraud, you can report it to the IRS by sending completed Form 3949-A Information Referral, to Internal Revenue Service, Fresno, CA 93888.