Tuesday, January 10, 2012

The "Dirty Dozen" of Tax Scams

The Internal Revenue Service has issued its 2010 “dirty dozen” list of tax scams, including schemes involving return preparer fraud, hiding income offshore and phishing.

“Taxpayers should be wary of anyone peddling scams that seem too good to be true,” IRS Commissioner Doug Shulman said. “The IRS fights fraud by pursuing taxpayers who hide income abroad and by ensuring taxpayers get competent, ethical service from qualified professionals at home in the U.S.”

Tax schemes are illegal and can lead to imprisonment and fines for both scam artists and taxpayers. Taxpayers pulled into these schemes must repay unpaid taxes plus interest and penalties. The IRS pursues and shuts down promoters of these and numerous other scams.

The IRS urges taxpayers to avoid these common schemes:

Return Preparer Fraud
Dishonest return preparers can cause trouble for taxpayers who fall victim to their ploys. Such preparers derive financial gain by skimming a portion 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. Taxpayers should choose carefully when hiring a tax preparer. 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.

To increase confidence in the tax system and improve compliance with the tax law, the IRS is implementing a number of steps for future filing seasons. These include a requirement that all paid tax return preparers 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.

Setting higher standards for the tax preparer community will significantly enhance protections and services for taxpayers, increase confidence in the tax system and result in greater compliance with tax laws over the long term. Other measures the IRS anticipates taking are highlighted in the IRS Return Preparer Review issued in December 2009.

Hiding Income Offshore
The IRS aggressively pursues taxpayers involved in abusive offshore transactions as well as the promoters, professionals and others who facilitate or enable these schemes. 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 also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or insurance plans.

IRS agents continue to develop their investigations of these offshore tax avoidance transactions using information gained from over 14,700 voluntary disclosures received last year. While special civil-penalty provisions for those with undisclosed offshore accounts expired in 2009, the IRS continues to urge taxpayers with offshore accounts or entities to voluntarily come forward and resolve their tax matters. By making a voluntary disclosure, taxpayers may mitigate their risk of criminal prosecution.

Phishing is a tactic used by scam artists to trick unsuspecting victims into revealing personal or financial information online. IRS impersonation schemes flourish during the filing season and can take the form of e-mails, tweets or phony Web sites. Scammers may also use phones and faxes to reach their victims.

Scam artists will try to mislead consumers by telling them they are entitled to a tax refund from the IRS 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 suspicious e-mails claiming to come from the IRS should not open any attachments or click on any of the links in the e-mail. Suspicious e-mails claiming to be from the IRS or Web addresses that do not begin with http://www.irs.gov should be forwarded to the IRS mailbox: phishing@irs.gov.

Filing False or Misleading Forms
The IRS is seeing 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. Phony information returns, such as a Form 1099 Original Issue Discount (OID), claiming false withholding credits usually are used to legitimize erroneous refund claims. One version of the scheme is based on a false theory that the federal government maintains secret accounts for its citizens, and that taxpayers can gain access to funds in those accounts by issuing 1099-OID forms to their creditors, including the IRS.

Nontaxable Social Security Benefits with Exaggerated Withholding Credit
The IRS has identified returns where taxpayers report nontaxable 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. Taxpayers should avoid making these mistakes. Filings of this type of return may result in a $5,000 penalty.

Abuse of Charitable Organizations and Deductions
The IRS continues to observe the misuse of tax-exempt organizations. 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 also continues to investigate 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.

Frivolous Arguments
Promoters of frivolous schemes encourage people to make unreasonable and outlandish claims to avoid paying the taxes they owe. If a scheme seems too good to be true, it probably is. The IRS has a list of frivolous legal positions that taxpayers should avoid. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or IRS guidance.

Abusive Retirement Plans
The IRS continues to find 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 phony 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. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS.

Sometimes fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme. Filings of this type of return may result in a $5,000 penalty.

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, taxpayers should 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 nontaxable 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.

How to Report Suspected Tax Fraud Activity
Suspected tax fraud can be reported to the IRS using Form 3949-A, Information Referral. The completed form or a letter detailing the alleged fraudulent activity should be addressed to the Internal Revenue Service, Fresno, CA 93888. The mailing should include specific information about who is being reported, the activity being reported, how the activity became known, when the alleged violation took place, the amount of money involved and any other information that might be helpful in an investigation. The person filing the report is not required to self-identify, although it is helpful to do so. The identity of the person filing the report can be kept confidential.

Whistleblowers also may provide allegations of fraud to the IRS and may be eligible for a reward by filing Form 211, Application for Award for Original Information, and following the procedures outlined in Notice 2008-4, Claims Submitted to the IRS Whistleblower Office under Section 7623.

William Deutchman, CPA www.wddcpa.com

Saturday, April 23, 2011

Asset Recovery of Unclaimed Funds

Over the course of my career of 35-plus years, I'd would say that the most interesting and satisfying work has been investigative work. Some call it forensic accounting, but I prefer not to use that term because it is most familiar to people when used in criminal matters. Another term that applies to this work is Asset Recovery.

It's probably the enjoyment that comes from the "hunt." I've always been on the lookout for information that leads to the recovery of assets, both monetary and tangible. With my unclaimed funds work, once I find the money, I have to locate the company or person to which the money belongs. The longer the money has been sitting dormant, the more likely that some changes have occurred which add to the challenge. Companies have closed, merged, been acquired; people have moved, changed names or have passed-away.

Also, it's never boring. I keep finding more and better resources to do the necessary research. I'm developing ways of being creative and letting my curiosity take me to new and interesting places. I believe that it results in finding and recovering assets that others have missed.

I take real pleasure in reuniting money with its owner when the money has been sitting dormant, often for decades. A recent example involved money that went missing when the man was in his early 40's and now he is in his early 80's.

Friday, March 4, 2011

Congress's View on Unclaimed Funds Recovery

As a result of the recent Congressional expenditure of billions of dollars in federal monies directed at keeping companies solvent, the government is now closely scrutinizing companies’ finances and practices. This scrutiny has revealed that many companies receiving bailout money actually have millions of dollars in unclaimed funds, to which they are entitled, but have consistently failed to claim.

US Representative Barney Frank, Chairman of the House Financial Services Committee, is demanding that such companies recover their unclaimed funds. Chairman Frank believes that if these companies were claiming their monies, there may not be a need for them to take federal bailout money.

Chairman Frank is now calling for a formal Congressional investigation into the failure of businesses to recover unclaimed funds, stating he will be insisting “they tell us what their whole systems [for recovering unclaimed funds] are, how did this happen, and more importantly, how do they stop it from happening in the future."

-As detailed in a March 2009 investigative report featured on Fox 7 Miami and NBC 7 Boston.

Thursday, July 1, 2010

Great News for First-Time Homebuyers Who Failed to Close by June 30

First-time homebuyers will have until Sept. 30 to close on their purchases and still receive an $8,000 tax credit under a bill passed by the Senate late Wednesday. The House overwhelmingly approved the bill on Tuesday.

President Obama is expected to sign the bill. The deadline had been June 30.

The bill doesn't extend the benefit to anyone currently shopping for a home. Buyers must have signed a contract by April 30 to qualify for the tax break. At issue is when the deal must be finalized. Many buyers who signed contracts by April 30 ran into delays that prevented the deal from closing by June 30. The extra 3 months granted by this bill is of great benefit to those buyers.

Qualified existing homeowners also have until Sept. 30 to close on new homes and receive a tax credit of up to $6,500.

William Deutchman, CPA www.wddcpa.com

Friday, November 6, 2009

Congress Extends and Expands Home Buyer Credits

The $8,000 first-time homebuyer credit that I wrote about months ago has been extended beyond its original expiration date this fall. The credit which was to expire at the end of November has been extended to the end of April, 2010.

In addition, the law has been expanded to allow homeowners who have occupied their homes for 5 consecutive years during the last 8 years to be eligible for a $6,500 tax credit. The law also increases the income limits and home purchase price limits that existed in the original law.

These changes are expected to continue to stimulate the home real estate sector of the economy.

William Deutchman, CPA

Saturday, July 11, 2009

First-Time Homebuyer Tax Credit - up to $8,000

Did you buy a home after April 8, 2008? If so, and it is your personal residence and you (and your spouse if married) did not own any other main home during the 3-year period ending on the date of the purchase of a new home, you probably qualify for a large tax credit. If you bought your home in 2009, and you qualify, you can even claim the credit on your 2008 tax return.

Even if you already filed your 2008 return, your return can be amended and you can get a refund of up to $8,000. I know it sounds too good to be true, but this is the federal government's way to stimulate the housing market that has been in a slump in recent years. The tax incentive is part of the recently enacted Housing and Economic Recovery Act of 2008.

I am a Certified Public Accountant (CPA) in Cleveland, Ohio and I can assist you by determining if you qualify and taking appropriate action if you do. Please see my contact information below and we can arrange to do what is in your best interests.

P.S. If you know of others who might be eligible for this tax credit, pass this information on to them. They will thank you for thinking of them.


Sunday, March 29, 2009

Save Your 2005 Tax Refund !!

Believe it or not, an unfiled individual federal income tax return that will show a refund, may soon be unavailable to the taxpayer. 

The reason is that although a late-filed return shows that the government owes the taxpayer, it may be too late to collect the money. The good news is that the taxpayer will not be penalized for late filing and late payment, and will not be assessed interest. But the bad news is much worse. 

If the return is filed after the statute of limitations has run out, the government wins and the taxpayer loses. Normally, the time for filing a return and obtaining a refund of an overpayment runs out 3 years after the return was due. That is sometimes referred to as the statute of limitations. 

The point is that a 2005 individual tax return must be filed by this coming April 15th. It would be wise to send it certified mail to be sure that you get proof that it is received timely by IRS. 

If you need help getting your return done, please contact me at 216-621-1120. But, Hurry !!!!