In the last post, we found that taxpayers should be wary of charity scams, always file their wages absolutely accurately, and never, ever use a frivolous argument to avoid paying taxes as this is a felony. Finally we have reached the last three of the “dirty dozen” tax fraud schemes and scams. These include falsely claiming zero wages, using abusive domestic and foreign tax structures, and misusing trusts. Remember that the dirty dozen list is not exhaustive, and tax fraud can take place in many forms so always be on the lookout.
Falsely Claiming Zero Wages or Using False Form 1099
Sometimes a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to reduce taxable income to zero—illegally. The fraudulent taxpayer may also submit a statement rebutting wages and taxes already reported to the IRS. Whether you improperly claim zero wages on your first return or improperly correct a return to reflect zero wages, you are committing fraud which may result in a $5,000 penalty.
If you come across variations of this scheme, be wise and steer clear entirely. Sometimes an individual will include an explanation on their Form 4852, using statutory language nit-picking the definition of wages, or perhaps they may reference a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Others attempt fraud using false Form 1099 refund claims. Another similar scam claims that the federal government has secret accounts for U.S. citizens. In order to gain access to these alleged accounts, the taxpayer files a false information return in conjunction with their return, such as a Form 1099 Original Issue Discount (OID). This is a scam! Don’t fall prey; never give your information away to those who will file false returns. You are responsible for what goes on your return, and as such you could be hit with penalties or face criminal prosecution for letting someone else file your return in an abusive (or uninformed) manner.
Abusive Tax Structures
Laws exist to protect the confidentiality of an individual’s foreign trust arrangements or other assets, but some have created sophisticated strategies and tax schemes to abuse such secrecy laws. By using complex multi-layer transactions that can be sent through multiple flow-through entities (frequently LLC, LLP, and IBC type businesses), offenders attempt to conceal the true nature and ownership of the taxable income and/or assets with their complicated transactions, offshore accounts, foreign credit/debit cards, etc.
Abusing your privileges may mean losing them. IRS Criminal Investigation (CI) is focusing their efforts to identify and investigate individuals and all other accomplices who promote, aid, assist, or further these schemes. CI is also targeting the investors who knowingly further these schemes by their participation.
The IRS reminds taxpayers to remember the words “form over substance” before buying into any arrangements that promise to “eliminate” or “substantially reduce” your tax liability. The IRS also encourages taxpayers to report unlawful tax evasion here.
Misuse of Trusts
There are many legitimate and helpful uses of trusts in estate planning, tax, and other purposes. However, the IRS has been aware of an increase in the improper use of private annuity trusts and foreign trusts. Abusers of trusts may try to shift income to deduct personal expenses, avoid estate transfer taxes and other income tax liability, and hide assets from creditors. Some of the highly questionable transactions the IRS sees include reduced taxable income, inflated deductions for personal expenses, the reduction or elimination of self-employment taxes and reduced estate or gift transfer taxes.
Trust arrangements should not be entered without first seeking the guidance of a tax professional who can help you safely navigate the trust, meet your tax responsibility and stay in compliance.
In case you missed the prior posts on the dirty dozen tax schemes, you can view them here: “Dirty Dozen” Tax Scams for 2014, Part 1; “Dirty Dozen” Tax Scams for 2014, Part 2; “Dirty Dozen” Tax Scams for 2014, Part 3
Although this sums up the dirty dozen for 2014, remember that other abusive and harmful schemes take many forms beside these common twelve scams. So be responsible, stay informed, and always be on the lookout.
If any of this information has raised concerns about your small business, we are here to help! Our Business Analysis is designed to help make sure you are in compliance and your business practices are sound and profitable. Contact us for more information – (310) 534-5577 or [email protected]
