9 tax scams to watch out for

November 18, 2005

These "strategies" can sound convincing, but they make money only for the crooks behind them.

Promoters of tax scams often target busy professionals precisely because they generally have very little time to spend on their finances. And, more and more physicians have been sucked in over the past few years.

A settlement reached just last month in one case will see one company returning approximately $500 million to participants in programs the IRS claimed were fraudulent. Participants, mostly physicians, will have to pay taxes on those payments. "Many doctors will owe huge sums," predicts CPA Sherman Doll, a principal with Capital Performance Advisors in Walnut Creek, CA.

Even if you never fall for a tax scheme, someone you care about could. To lessen the chances, take note of these popular scams that the IRS has identified.

How can you avoid the scam artists? If you're thinking of setting up a trust, consult a trusted professional-preferably an attorney who specializes in estate planning.

2. "Come to us for a huge refund!"

In this scam, an unscrupulous tax preparer lures you with the promise of a large refund, then skims a portion of that refund on top of charging inflated fees for doing your returns. Since 2002, these crimes have triggered a flood of injunctions ordering individuals to stop preparing returns, and the Department of Justice has filed dozens of other complaints, which are pending. The IRS reminds taxpayers of the old adage, "If it sounds too good to be true, it probably is."

3. "Set up your own tax-exempt organization."

The IRS has seen an increase in the number of individuals who move assets or income to a tax-exempt organization or a "donor-advised" fund (a legal vehicle for charitable giving). However, those who are unscrupulous maintain control of the money-effectively getting a tax deduction without really transferring the benefit to charity.

Another example of this sort of ruse is the "contribution" to a tax-exempt conservation organization of a historic facade easement, which is a legal agreement that allows the owner of a historic building to establish certain preservation restrictions while retaining possession and use of the building. In return, the owner may benefit from a charitable deduction that can be applied to federal income taxes. However, in many situations, a town's historic preservation laws already prohibit alteration of the home's facade, making the contributed easement unnecessary. Even in situations where the alterations are legal, the deduction claimed for the contribution often exceeds the easement's impact on the property's value.

4. "Open an offshore account and never pay taxes again!"

Everyone's heard of criminals who hide money in accounts in The Bahamas or the Cayman Islands. Even though the IRS and state tax agencies have cracked down, individuals still try to dodge taxes by illegally hiding income. They use offshore bank and brokerage accounts or offshore credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities, or life insurance. If one of these schemes is pitched to you, don't be tempted-the IRS and state tax agencies aggressively pursue these abuses.