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IRS Issues Its Annual “Dirty Dozen” List of Tax Scams


by Brian Mahany

Its days before individual income tax returns are due and the IRS press machine remains in high gear. In recent years, the IRS has issued an annual list of the most popular tax scams. The list is helpful for two reasons. One is to protect the public and two, because it offers a good window of where the IRS will be focusing its audit and criminal fraud efforts.

At the top of the list this year is “Hiding Income Offshore.” This should not come as a surprise to anyone following the news. For the last several years, the IRS has aggressively pursued taxpayers who fail to report offshore income or fail to report offshore accounts.

Unfortunately, many taxpayers still don’t know that even offshore accounts that don’t generate any income must generally be reported to the government. Failing to file a Report of Foreign Bank and Financial Accounts (FBAR) is both criminal and carries high civil penalties – up to half the maximum dollar value of the account.

Presently there is an amnesty called the offshore voluntary disclosure initiative that runs through August 31st.

Also on the dirty dozen list this year is “Abuse of Charitable Organizations and Deductions.” The IRS says they are seeing taxpayers using charities to illegally shield income from taxation and donors attempting to maintain control over donated assets or income from donated property. In one common scheme, a charity will provide a donation letter listing an inflated value of the donation and later sell the item back to the donor for a much lower price. The charity gets cash, the donor gets a large deduction, and the IRS cries foul.

Misuse of trusts is again on the list. In recent years, the Internet has become a hotbed of trust promoters. While trusts can be a legitimate asset protection, tax planning and estate planning device, some of the dubious promoters make wild promises of avoiding all taxes. Their promises are rarely accurate subjecting the taxpayer to high penalties or worse.

If you wish to explore the benefits of a trust or an asset protection plan, be wary of “one size fits all” packages hawked on the Internet.

“Abusive Retirement Plans” are also on this year’s list. This year the IRS is looking at taxpayers and their advisers who attempt to circumvent annual contribution limits by undervaluing assets transferred into an IRA. Welfare benefit scams remain another highly abused device.

“Disguised Corporate Ownership” is on the list this year. Although I am not sure that this is really a problem, the IRS has listed it in its top 12 list meaning it is sure to receive attention from auditors and special agents.

From our experience, the IRS is always suspicious when an individual has a large constellation of business entities with frequent transfers between them. There may be legitimate business reasons for the set up but expect questions.

Mahany & Ertl is a full service, boutique law firm that assists taxpayers with a wide array of tax matters. Our Milwaukee based tax attorneys can help with tax compliance, offshore amnesty, criminal tax defense, audit defense, collections, abusive tax shelters and unwinding welfare benefit plans. We also assist clients in asset recovery and fraud cases.

For a no obligation, no nonsense consultation, contact attorney Brian Mahany at (414) 704-6731 or at brian@mahanyertl.com.

Mahany & Ertl, LLC – Offices in Milwaukee, Wisconsin; Detroit, Michigan; and Portland, Maine. Services performed nationwide.

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