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US tax scams dirty dozen

16th Apr 2010
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A run-down of the most common US tax fiddles, including return preparer fraud, income offshore hiding and phishing.

The US’s Internal Revenue Service (IRS) has released a list of the most common tax scams, urging taxpayers to remain vigilant against schemes which can lead to imprisonment and fines for both the con artist and the taxpayer. Should HMRC implement something similar in the UK? Read the list and give us your views below.

Return preparer fraud
The IRS warns that some dishonest return preparers have been skimming of portions of their clients’ refunds, charging inflated fees for return preparation services and attracting new clients by promising refunds that are too good to be true. Federal courts have issued injunctions ordering hundreds of individuals to cease preparing returns and promoting fraud, and the Department of Justice has filed complaints against dozens of others, which are pending in court. The IRS has implemented a number of steps to combat this. These include a requirement that all paid agents register with the IRS and obtain a preparer tax identification number (PTIN), as well as both competency tests and ongoing continuing professional education for all paid tax return preparers except attorneys, certified public accountants (CPAs) and enrolled agents.

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

Phishing is a tactic used by scam artists to trick unsuspecting victims into revealing personal or financial information online. This issue has reared its ugly head on both sides of the Atlantic, with both the IRS and HMRC warning taxpayers about email scams which claim to be from these entities.

Scam artists will try to mislead consumers by telling them they are entitled to a tax refund and that they must reveal personal information to claim it. Criminals use the information they get to steal the victim’s identity, access bank accounts, run up credit card charges or apply for loans in the victim’s name.

Taxpayers who receive suspicions emails are advised to contact the IRS or HMRC (as the case may be) and not open any attachments or click on any links in the email.

Filing false or misleading forms
The IRS has reported various instances where scam artists file false or misleading returns to claim refunds that they are not entitled to. Under the scheme, taxpayers fabricate an information return and falsely claim the corresponding amount as withholding as a way to seek a tax refund.

Non-taxable social security benefits with exaggerated withholding credit

The IRS has identified returns where taxpayers report non-taxable social security benefits with excessive withholding. This tactic results in no income reported to the IRS on the tax return. Often both the withholding amount and the reported income are incorrect.

Abuse of charitable organisations and deductions

Also on the IRS list were a number of taxpayers who misused tax exempt organisations. Abuses include 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 also says its investigating various schemes involving the donation of non-cash assets including situations where several organisations claim the full value for both the receipt and distribution of the same non-cash contribution. Often these donations are highly overvalued or the organisation receiving the donation promises that the donor can repurchase the items later at a price set by the donor.

‘Frivolous’ arguments

Promoters of frivolous schemes encourage people to make unreasonable and outlandish claims to avoid paying the taxes they owe. The advice from the IRS is that if a scheme seems too good to be true, it probably is.

Abusive retirement plans
The IRS has reported abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers use to avoid the limits on contributions to IRAs, as well as transactions that are not properly reported as early distributions. Taxpayers should be wary of advisers who encourage them to shift appreciated assets at less than fair market value into IRAs or companies owned by their IRAs to circumvent annual contribution limits. Other variations have included the use of limited liability companies to engage in activity that is considered prohibited.

Disguised corporate ownership
Corporations and other entities are formed and operated in certain states for the purpose of disguising the ownership of the business or financial activity by means such as improperly using a third party to request an employer identification number.

Such entities can be used to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance with the law.

Zero wages
Filing a false wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed.

Misuse of trusts

For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are many legitimate, valid uses of trusts in tax and estate planning, some promoted transactions 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 to hide assets from creditors, including the IRS.

The IRS has recently seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, the IRS advises taxpayers to seek the advice of a trusted professional before entering into a trust arrangement. 

Fuel tax credit scams

The IRS receives claims for the fuel tax credit that are excessive. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But other individuals are claiming the tax credit for non-taxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim and potentially subjects those who improperly claim the credit to a $5,000 penalty.

*With thanks to Baker Tilly’s George Bull for highlighting the relevant link on the IRS site.


Replies (2)

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By User deleted
20th Apr 2010 12:30

Tax evasion

Low scale tax evasion in the UK construction industry is a fairly common ocurrence. 

Underreporting of income and non-payment of VAT is widespread in retail, leisure and catering industry.

 Abuse of charitable status, VAT fraud, offshores - the list goes on and on - it is all there.

What do you expect from a country where even some parliamentarians are confused about their tax status?

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By uniteform
29th Apr 2010 10:31

Better Training in International Tax Law

Suggest the guys involved take some good olb British training in international tax law at


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