IRS Releases List of "Dirty Dozen" Tax Scams

April 13, 2011

In an April 8, 2011, news release (IR-2011-39), the IRS released its “worst of the worst” tax scams list, warning that along with the Department of Justice, it will pursue perpetrators of these illegal scams. Promoters can face heavy fines and imprisonment while tax payers will be required to repay all taxes due plus interest and penalties.

This Year’s List

  1. Hiding income offshore.
  2. Identity theft and phishing.
  3. Tax return preparation fraud.
  4. Filing false or misleading forms.
  5. Frivolous legal positions or arguments.
  6. Nontaxable Social Security benefits with exaggerated withholding credit.
  7. Abuse of charitable organizations and deductions.
  8. Abusive retirement plans.
  9. Disguised corporate ownership.
  10. Filing phony wage or income-related returns to reduce wages to zero.
  11. Misuse of trusts.
  12. Fuel tax credit scams.

Three of the more egregious and abusive situations that the IRS has identified to be avoided that may be specifically applicable to charitable and nonprofit organizations are hiding income offshore; abusing charitable organizations and deductions; and misusing trusts.

Hiding Income Offshore

The IRS said taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks, brokerage accounts, or through the use of nominee entities. Taxpayers have evaded taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or insurance plans.

Abusing Charitable Organization and Deductions

Abuse includes arrangements to improperly shield income or assets from taxation, and attempts by donors to maintain control over donated assets or income from donated property. The IRS is investigating various schemes involving the donation of non-cash assets including situations where several organizations claim the full value for both the receipt and distribution of the same non-cash contribution.

Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals, and set new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions.

Misusing Trusts

Unscrupulous promoters have urged taxpayers to transfer assets into certain trusts based on questionable transactions that promise reduction of income subject to tax, deductions for personal expenses, and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means to avoid income tax liability and hide assets from creditors, including the IRS.

IRS personnel have recently seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses.

Note: The IRS cautions taxpayers and organizations to “consult trusted counsel before entering into transactions that appear too good to be true.”

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