Article - Tax Scams

Tax Avoidance Scams can be Taxing

by Jef Henninger, Esq.

March 2008

No one enjoys tax time, especially if you will not be getting a refund. For some, it's a time to find ways to avoid paying taxes or get a much larger refund than they otherwise would receive. This year, the declining housing market and economy combined with the stimulus checks due in May could lead to an increase in tax avoidance scams. This is because some people will find themselves in a desperate situation and quick way to boost their income may be an attractive option to avoid financial problems.

Some tax scams are blatantly illegal. Padding returns with false qualifying dependents may see an increase this year. In this scam, a shady tax preparer may use social security numbers from other clients and add them on your return. They are often listed as foster children or nieces and nephews. Rarely can this be explained to the tax filer with any legitimacy. We have represented clients who have allegedly prepared dozens of returns using this scam.

The reason why it may be on an increase this year is because of the Federal stimulus checks that are due to most tax filers. In addition to the $600 for single tax filers and $1,200 for a married couple filing jointly, a family will receive an additional $300 per dependent. Because the stimulus checks are in addition to any refund received, there is extra incentive for false dependents to be added to a return.

Other scams are not so obvious. A slick tax preparer can justify any number of scams by promising big returns and using terms the filer may be unfamiliar with such as trusts. For some people, trusts are a great way to properly manage and transfer wealth. In fact, the IRS reports that trust returns are the third most frequently filed income tax returns behind income and corporate returns.

However, there are many shady promoters and tax preparers that claim that they can set up a trust to reduce numerous tax liabilities such as a reduction or elimination of income subject to tax, self employment tax, as well as gift and estate taxes. There are numerous variations of these trusts and they go by many names including pure trusts, business trusts, constitutional trust and family residence trust. They can also involve foreign countries in the case of an asset protection trust. These trust scams are usually targeted towards lawyers, doctors and small business owners, especially the newly wealthy who are not accustomed to large tax bills.

There are numerous other tax scams out there and new ones pop up each year. As long as there are people who are looking to cheat the IRS or make a quick buck, there will be shady promoters and tax preparers ready to take their money to help them. Having someone else defraud the IRS on your behalf may seem like a great way to shield yourself from any liability. However, the tax filer is ultimately responsible for any penalties and can be subject to criminal charges.

The best way to protect yourself is to remember that if it sounds too good to be true, it most likely is. Properly managing your taxes will likely take some financial planning with a good accountant. Forming a long term relationship with a reputable tax preparer will go a long way in avoiding problems. If you have a question about something your tax preparer suggests, there is no excuse to not do your own research. The IRS website (www.irs.gov) has a wealth of information that is surprisingly easy to read given the complexity of our tax code. You should also avoid doing business with anyone that proposes any tax avoidance or reduction scheme even if you do not follow their advice. By having them prepare your taxes, you may open yourself up to IRS investigations, audits or identity theft.

The IRS is actively investigating abusive trusts and a large number of other tax avoidance scams. The IRS catches some scams quickly while they may take a considerable amount of time with others. If you believe that you may have participated in an illegal tax avoidance scheme at any time, you should contact an attorney as soon as possible. Being up front and proactive about your participation may help you avoid serious penalties. A good attorney can assess your situation and advise you accordingly. Finally, if the IRS or any law enforcement agency attempts to question you regarding your tax returns or any other suspected criminal activity, you should remember that anything you say, regardless of how innocent it may seem, can be used against you in numerous ways. Contact an attorney immediately for assistance.