by Brian Mahany
With just 2 weeks before taxes are due, the IRS has cranked up their publicity machine. Indictments, public service announcements and lots of information. One of the more interesting stories is the IRS “dirty dozen” tax scams. While identity theft occupies the number 1 spot again, several “scams” warrant special mention.
Near the top of IRS’ list this year is offshore banking. While we don’t consider this a scam at all, the IRS is hot on the trail of people with unreported foreign accounts. In the last several years, the IRS has captured over $5 billion in new tax revenue – enough to justify the hundreds of new agents now assigned to tracking down offshore monies.
In our experience, most people with unreported foreign hedge funds, bank accounts and annuities simply don’t understand the FBAR reporting requirements. (Foreign accounts must be reported annually on a Report of Foreign Bank and Financial Accounts also known as an FBAR.)
Inflated and bogus credits and deductions is a perennial favorite. Get creative and risk a $5000 penalty. Get really creative and the risks include prison. Every year some taxpayers try and pad their deductions and the IRS refines their computer systems to detect when people go too far. Also added to this list are the phony refund scams.
Although our clients rarely come to us with phony refund problems, we do see some taxpayers caught after advancing “frivolous” tax arguments. These so-called “tax defiers” always incur the ire and wrath of the IRS. If you really want to poke a stick in the giant’s eye, write a letter to the IRS telling them the 16th Amendment to the Constitution was never ratified or that the income tax only applies to federal employees. While there is tons of literature and research on the Internet that might lend credence to these arguments, all have been rejected by the courts. Play this game and you get an audit and a knock on the door. At a minimum expect a frivolous position penalty.
One that is becoming more popular is “disguised corporate ownership.” A strawman or third party creates a corporation and obtains a tax ID number. That corporation is then used to launder money, underreport income or participate in abusive tax shelters. If caught, the lack of a paper trail makes it difficult to identify the true corporate owners. These shell companies are sometimes called nominee entities. The IRS will criminally prosecute those that intentionally use such shells to evade taxes.
Finally, on the list this year IRS are foreign trusts. While there is nothing illegal about having such a trust, some “asset protection” promoters claim these trusts can be used to avoid taxes. Although that sounds great, in most cases taxpayers wind up with an audit and huge penalties.
This post only touched upon a few scams. Every year, taxpayers and promoters get creative with new schemes. Sometimes people just get in trouble simply because they can’t pay their taxes and rather then call the IRS and try to work out a solution, they get creative or simply stop filing. If you receive an audit notice or knock on the door telling you that a criminal investigation has started, contact us immediately. The earlier we get involved, the better the chances for a successful resolution.
For more information, contact attorney Brian Mahany at or by telephone at (414) 704-6731. All inquiries are protected by the attorney – client privilege and kept in strict confidence. The consultation is free and most services can be handled on a flat fee basis.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and San Francisco, California. IRS tax services available worldwide.
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