Income tax time is a time to be wary of con artists who pose as tax preparers. These con artists capitalize on your greed to lure you into their traps. They say they know a secret tax law that allows deductions of tens of thousands of dollars on your tax return resulting in a large tax refund. Once you start visualizing how you will spend this money, you are in their clutches.
What the con artist does not tell you is that the IRS will reverse your tax strategy. You will not only pay back taxes but will be charged interest and penalties, which can often be as much as the tax.
Here are some of the schemes you should avoid:
1. Identity theft. Normally you associate it with credit card receipts or the Internet. But if you give your tax papers to a con artist to prepare your returns, he now has your life history – previous tax returns, bank account numbers, mortgage information, and even where you buy your prescriptions. By using this personal data, the con artist can assume your identity, claim for fraudulent tax refunds for several past years and obtain credit in your name.
2. 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. This results in the employer paying back all taxes with interest and penalties
3. Improper home-based business . This scheme purports to offer tax "relief" but in reality is illegal tax avoidance. Promoters claim that individual taxpayers can deduct most, or all, of their personal expenses as business expenses by setting up a bogus home-based business.
4. Pay no income taxes. Fat chance – do not believe them. When a scheme promoter says "I don't pay taxes – why should you?" or urges you to "untax yourself for $49.95," BEWARE. The courts have continuously rejected these claims. Unfortunately, hundreds of people across the country have paid for the "secret" of not paying taxes only to find out they face civil, and possibly criminal penalties.
5. Social security tax scheme . This scam offers refunds of the Social Security taxes paid during one's lifetime. 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. The law does not allow a refund of Social Security taxes paid and of course, the con artist has escaped with your money by the time you hear these refunds do not exist.
6. "I Can Get You a Big Refund ...for a Fee!" Refund scheme operators may approach you wanting to give you a phony W-2 so it appears that you qualify for a big refund. They may promise to split the refund. But the IRS catches most of these false refund claims before they go out. And when one does go out, the participant must pay back the refund along with stiff penalties and interest.
7. Offshore transactions . Some people funnel earned money offshore 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.
8. Phony tax payment checks. The con artist sells fictitious financial instruments that look like checks to pay a tax liability, mortgage and other debts. This even includes overpaying your taxes using this phony check and claiming a refund. The false checks, called sight drafts, are worthless. People using such a scheme not only have a tax problem with the IRS, but also face serious charges with the U.S. Treasury for issuing counterfeit checks.
9. Share/borrow dependents . Unscrupulous tax preparers "share" one client's qualifying children with another client 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 credit. 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. Be warned. The IRS will prosecute the preparer and participating taxpayers.
10. IRS "agent" comes to your house to collect . Do not let people into your home unless they identify themselves with proper credentials. 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.
Use these guidelines when choosing a tax preparer:
Avoid preparers who charge a fee based on the percentage of the refund.
Be wary of official-looking tax positions that cite the U.S. Constitution, Bill of Rights or other historical documents that have nothing to do with tax law.
Avoid preparers who propose aggressive tax positions based on the low number of tax audits. The IRS does in fact audit very few returns because the majority of returns do not show aggressive tax positions.
Tax code, rules and positions are well publicized, researched and documented. Ask for such documentation before allowing your return to be prepared using an aggressive tax position.
If you are suspicious of a proposed tax position get a second opinion. Paying a tax professional for such an opinion is cheap compared to paying back taxes, penalties and interest to the IRS.
