As it does each year, the IRS has released its Dirty Dozen – the top tax scams taxpayers should be aware of. This year the IRS has included a 30-second video on YouTube warning: “If it seems too good to be true, ask a reputable tax advisor or go to www.irs.gov.” Unfortunately, after watching the video on the YouTube site, some of the suggested follow-ups YouTube offers promote just such tax scams. Ouch!
On this year’s list:
- Phishing
- Hiding Income Offshore
- Filing False or Misleading Forms
- Abuse of Charitable Organizations and Deductions
- Return Preparer Fraud
- Frivolous Arguments
- False Claims for Refund and Requests for Abatement
- Abusive Retirement Plans
- Disguised Corporate Ownership
- Zero Wages
- Misuse of Trusts
- Fuel Tax Credit Scams
Offshore Transactions
The IRS is concerned about offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities and life insurance plans. It has also seen schemes that involve electronic funds transfer and payment systems, offshore business merchant accounts and private banking relationships.
These “offshore” accounts include those 52,000 Swiss bank accounts the IRS is going after that may have as much as $15 billion taxable income. Of course, in this age of government bailouts, Everett Dirksen’s famous quote may need to be rephrased to read “A [trillion] here, a [trillion] there, and pretty soon you’re talking about real money.” Most people have forgotten that he also said “We are becoming so accustomed to millions and billions of dollars that ‘thousands’ has almost passed out of the dictionary.” Maybe it’s millions that has almost passed out of the dictionary now. While we’re talking about Dirksen, Ralph Keyes in his book The Quote Verifier: Who Said What, Where, and When
The IRS says it draws a line in how it treats those who come forward themselves and those they have to dig out of their hidey holes.
Charitable Gifts
On the charitable front, the IRS reminds you not to claim that a gift is worth more than it really is – with a cautionary reminder that Congress a few years ago increased penalties for such gifts. It apparently has seen this a lot with gifts involving real estate (including easements) and closely-held stock. It also doesn’t like gifts you never make (like when the charity agrees to sell the property you gave back to you at whatever price you set).
Frivolous Arguments
These consist of a whole potpourri of schemes. In fact, the IRS has an entire set of web pages dedicated to listing them categorizing them and countering them point by point. You can download a 77 page PDF with cites of court after court case refuting both the common protests and the litany of due process arguments. The Service notes that there is a $5,000 (non-deductible) fine for submitting a tax return based on one of those frivolous positions. While no one would argue the IRS is always right just because they are the IRS, in the arena of frivolity, these positions have long been refuted by all but the most hard core tax protestors.
Retirement Plans
The one on abusive retirement plans is interesting. The IRS says it “continues to uncover abuses in retirement plan arrangements, including Roth IRAs.” It specifically is looking for:
- transactions avoid limits on contributions to IRAs,
- money taken out of retirement plans that is not properly reported as an early distribution,
- shifting appreciated (but undervalued) property into IRAs to circumvent annual contribution limits,
- use of limited liability companies to engage in “prohibited” activities.
The third point may benefit from a further explanation. Let’s say you have appreciated property worth $200,000. We all know that real estate values have fallen in many parts of the country. Just how much it is worth now is debatable, right? And lets say you have a SEP IRA. You’d like to move that property into your SEP. To put the whole thing in during 2009, it can’t be worth more than $49,000 (the 2009 contribution limit for SEP IRAs). So you push the value a little and claim your property is only worth $49,000.
Often this ‘dirty dozen’ trick relies on the vagaries of appraisals. It IS hard to value property. And you CAN find qualified appraisals who will differ in their opinion of value. But remember that old adage quoted by my law school tax professor the first day of tax class: Pigs get fat. Hogs get slaughtered. Sometimes you can push the line. Push too hard and the line breaks and the wrath and fury of the IRS descends on you like a nightmare from Hollywood.
Abusive Trusts
A perennial on this list is abusive trusts. Yes, there are legitimate, valid uses of trusts in tax and estate planning. The problem starts when promoters (improperly) promise that the trust will let you deduct personal expenses (like your food or mortgage payment) or that it will reduce income, gift or estate taxes. It says these trusts “rarely deliver the promised tax benefits” and that the real motive behind them is to hide assets from people you owe money to – including (it says without a smile) the IRS. It has seen an increase “in the improper use of private annuity trusts and foreign trusts to divert income and deduct personal expenses.”
You can read more about the rest of the Dirty Dozen on the IRS website. Or do a Google search for “IRS dirty dozen” to find what others are saying about them.
The IRS, at the end of the release, tells you how to report (and how to claim a reward for blowing the whistle on) suspected tax fraud. But don’t get your hopes up. You only get the reward if the tax amount in question exceeds $2 million and the individual taxpayer’s gross annual income is more than $200,000.
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