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Tax "tips" that can land you in jail


Some of these ruses sound very convincing, but they make money only for the crooks behind them.


Tax "tips" that can land you in jail

Some of these ruses sound very convincing, but they make money only for the crooks behind them.

By Dennis Murray
Senior Editor

No one wants to pay taxes. And no one knows this better than the scam artists who try to lure people into their illegal tax schemes. Thanks to the Internet, which makes it easier for crooks to contact unsuspecting victims, these scams are proliferating faster than the IRS can prosecute the people who perpetrate them.

The penalties for getting caught can be severe, however—not only for the perps, but for their prey, too. In January 2002, two California physicians—an ENT specialist and an orthopedic surgeon—were fined and sent to prison for their involvement in a scheme to funnel their income through offshore bank accounts, to conceal it from the IRS. At his sentencing, the surgeon, Daniel M. Bullock, told the judge, "I put money first, and made some very bad decisions." He'll have at least 15 months in jail to ruminate.

Even if you never become a target of one of these schemes, one of your employees, friends, or loved ones could. To help keep that from happening, take note of these popular tax scams that the IRS has identified.

"Set up a trust, and owe the government nothing!" The Feds are cracking down on a recent rash of illegal domestic and foreign trusts, created by promoters who target the wealthy and charge as much as $70,000 to help hide taxable income.

In a legitimate trust, an independent trustee holds legal title to the trust assets and manages them on behalf of a beneficiary. On the surface, that's what many illegal trusts look like, but when the veneer is peeled back, the taxpayer is the one directing the money. For instance, one popular setup allows a person to funnel income to an offshore account and draw out funds using a debit or credit card linked to it. Another arrangement involves fraudulent, "nontaxable" loans that are wired back to banks in the US.

"Special refund for African-Americans!" Whatever the pitchman tells you, the IRS does not allow a tax credit or refund for slavery reparations or racial discrimination against African-Americans. Yet, in 2001, the agency was flooded with nearly 80,000 claims for such money, totaling more than $2.7 billion. The criminals who promote this scheme promise to help the taxpayer receive a substantial refund—generally $40,000 to $80,000. But before they agree to do the paperwork, they collect a flat fee or a percentage of the expected refund up front. The IRS says that taxpayers who don't rescind the claim after an initial warning can be fined $500.

"Only suckers pay taxes." Solicitors who make this statement say they don't file returns or pay taxes. And for a fee they'll be happy to share their "secret." The real secret is that many of these scam artists do pay taxes; they just don't reveal that. In the meantime, they bombard people with messages saying that paying taxes is a "voluntary" action in a free society and not mandatory. Fortunately, many of these crooks have been convicted for charging money for their bogus advice—but not before they took down a lot of gullible folks.

"Forget about withholding tax." The promoters of this scheme say it's okay for employers not to withhold federal income taxes or employment taxes from employees' wages. Bad advice, for which they command a fee. This scam is similar to the previous one in that it's based on a dubious, and incorrect, interpretation of federal tax law. Questions about withholding requirements should be directed to the IRS at 800-829-1040. Its Web site ( www.irs.gov) posts related forms and publications.

"Pay us the tax to claim your prize." Scammers tell victims they've won a car or a trip; to collect, all they have to do is pay the tax due on the gift's value. The caller then promises to make all of the arrangements needed to collect the prize. After the "winner" pays, the caller never contacts him again. Surprise!

When someone legitimately wins a prize, the giver sends the winner a Form 1099 showing the value that must be reported to the IRS. Yes, the recipient must pay gift taxes—but to the IRS, not a third party.

"Get back your Social Security taxes—now!" For a processing fee of about $100 and a percentage of money recovered, the scammer promises to file a claim for Social Security taxes paid during the taxpayer's lifetime. By law, the IRS won't allow such a refund. But a lot of people fall for the hoax and wind up poorer for it.

"We're here to collect your taxes, Sir." Posing as IRS agents, crooks comb residential neighborhoods, asking for money to cover back taxes. The IRS says this should immediately trigger skepticism, because its representatives typically try to make contact in some other manner before they visit in person. The best response to a rap on the door would be to call the police, the agency says. Taxpayers should also report suspicious-looking "agents" to the Treasury Inspector General's Hotline (800-366-4484).

"Home business owners, take note." Under the guise of offering tax "relief," these con artists charge taxpayers for tips on how to set up a bogus home business and deduct most, or all, of their personal expenses as business expenses. The Tax Code clearly prohibits any business deductions in the absence of a clear business purpose and profit motive.

"Buy a pay phone, get a tax credit." In this ruse, swindlers try to get people to invest in expensive volume-adjustable coin-operated phones, which they will place in designated locations. The investment pays off, they say, because the volume controls mean the taxpayer will earn a $5,000 "disabled access credit." What the perpetrators don't mention is that a claim for such a credit wouldn't pass muster with an IRS agent.

These are only some of the scams out there; crooks are cooking up new ones every day. If you or anyone you know is approached with a proposal that sounds too good to be true, consult a tax professional. And if you suspect it's a tax scheme, report it to the IRS' fraud hotline at 800-829-0433. "It's your name on that tax return," warns an IRS spokesperson, "so be extremely careful about whose advice you follow."


Dennis Murray. Tax "tips" that can land you in jail. Medical Economics May 9, 2003;80:69.

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