Wednesday, April 9, 2008

More Sleazy Tax Scams that Could Catch You on the Hook!

Taxus did a previous post on how the rebate check could be the right incentive to entice scammers. I'd like to add to his warning here with some general time-tested scams that seem to never fade away.
The Internal Revenue Code is filled with legitimate ways to reduce your tax bill. Even so, many people look for more aggressive tax shelters--and the Internet has opened a whole new world for tax scammers in search of prey.

If you go beyond tried-and-true tax reduction techniques, such as deducting home mortgage interest or making pretax 401(k) contributions, you may make yourself vulnerable to con artists. Not only might you pay for bogus advice, you could wind up owing interest and perhaps penalties and back taxes. Here are tax schemes--new and old--to watch out for...

Cheating accountants. While there are many conscientious tax preparers, there also are plenty willing to inflate your personal or business expenses, encourage you to take false deductions and/or include excessive exemptions and apply impermissible credits.

You may think it's wonderful to have a tax preparer who is willing to "bend the rules" for you, but returns prepared by third parties are subject to the same scrutiny as self-prepared returns -- and you still are responsible for their accuracy. Moreover, the IRS keeps a list of "problem preparers" -- their returns get extra attention.

Don't work with tax preparers who promise you substantial tax savings that you haven't achieved in the past. Check out this post for tips on choosing a preparer.

Offshore tax havens. Many tax scams involve "hiding" income in a foreign bank, brokerage account or certain types of trust, but moving money offshore doesn't excuse you from your responsibility to pay income tax. Just ask Steve Irwin. Indeed, the IRS has beefed up its enforcement efforts in this area. The post-9/11 security environment makes it much more difficult to keep foreign financial maneuvers from detection.

Bogus charities. Donating cash or other assets to charity is among the long-standing tax-reduction tactics available to taxpayers who itemize deductions. There are limits, though.

For example, John Johnson can't simply create the Johnson Foundation and then write checks to this self-directed organization and take deductions. To be deductible, a charitable donation must be made to a tax-exempt organization recognized as such by the IRS.

The tax-exempt organization, in turn, must engage in qualifying activities. If the entire venture is a sham and you retain control of the money for personal use, deductions will be disallowed -- and you could face criminal charges.

Come back for some Tax Scam Urban Legends (ooooooh)!

If you DO fall victim to any of these scams, seek honest tax representation... the operative word being "honest." Because there are scammers everywhere...

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