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IR-2003-18,
Feb. 19, 2003
WASHINGTON
– In an update of an annual consumer alert, the Internal Revenue
Service urged taxpayers to avoid falling victim to one of the “Dirty
Dozen” tax scams. In the new 2003 ranking, several new scams
have reached the top of the consumer watch list, including offshore
banking and identity theft schemes.
“With
the tax season in full swing, we’re seeing the traditional
upswing in tax trickery,” said IRS Acting Commissioner Bob
Wenzel. “Year after year, con artists across the nation try
pulling a fast one on honest taxpayers with different types of miracle
tax solutions. Don’t be fooled by the ‘Dirty Dozen’
and other misleading scams. There is no secret way to get out of
paying taxes.”
The
IRS and other federal agencies are aggressively pursuing and successfully
prosecuting promoters of these schemes and many of their clients
for fraud and tax evasion. These can result in imprisonment, fines
and repayment of taxes owed with interest and penalties. Even innocent
taxpayers involved in these schemes can face a staggering amount
of back interest and penalties.
Taxpayers
who suspect tax fraud can report it to the IRS at 1-800-829-0433.
The
IRS urges people to avoid these common schemes:
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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.
Through April 15, the IRS is offering people with improper offshore
financial arrangements a chance to make things right. Eligible
taxpayers who step forward will not face civil fraud and information
return penalties. A taxpayer involved in these schemes who does
not come forward now, however, will be subject to payment of
taxes, interest, penalties and potential criminal prosecution.
People interested in participating in the program, called the
Offshore Voluntary Compliance Initiative, can contact the IRS
by calling 215-516-3537 (not toll-free).
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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.
For taxpayers, it pays to be choosy about disclosing personal
and financial information. And the IRS encourages taxpayers
to carefully select a reputable tax professional.
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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.
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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.
In early 2002, the slavery reparations scam ranked as the No.
1 scheme on the Dirty Dozen list. Following a sweeping public
outreach campaign and assistance from members of the Congressional
Black Caucus and other organizations, the number of reparation
scam claims fell sharply. Tens of thousands of claims were received
in 2001, but the claims fell to less than 50 per week in 2002.
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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. Taxpayers
who have concerns about their employer and employment taxes
can get help by calling the IRS at 1-800-829-1040.
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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.
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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.
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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.
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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.
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"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. Two lessons
to remember: 1) Anyone who promises someone a bigger refund
without knowing their tax situation could be misleading them,
and 2) Never sign a tax return without looking it over to make
sure it’s honest and correct.
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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.
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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. To report IRS impostors, call the Treasury Inspector
General’s Hotline at 1‑800‑366‑4484.
Beyond
the "Dirty Dozen," the IRS sees many more
tax schemes. Some examples include home-based business scams,
disabled access credit for pay phones and a variety of improper
abusive trusts.
"The
best advice for taxpayers is to remember the concept of "buyer
beware,"" Wenzel said. "Think carefully before paying
for services or signing important documents. And don’t be
fooled by outrageous promises. If something sounds too good to be
true, it probably is."
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