Urban Legends: Ridiculous Reasons That Will Not Get You Out of Paying Your Taxes

As absurd as they sound, these age-old pitches still dupe many people:

Frivolous arguments. In this rip-off, taxpayers are told that there are constitutional grounds for claiming that paying taxes is voluntary. You might be led to believe that the Sixteenth Amendment -- the one that gives Congress the right to collect income taxes -- was never ratified. This position is called the "861 argument" and it has been most recently associated with Wesley Snipes' tax debacle.

Sorry to break it to yah Snipes, but there is no validity to such contentions. The IRS has been collecting income tax for nearly a century and will continue to do so.

Zero wages. Here, you're provided with a fake IRS Form 1099-MISC (Miscellaneous Income) that replaces the real form you received. You're told to attach the substitute form, which shows little or no income, to your tax return.

On the substitute form is a supposed "correction" of information already reported to the IRS. Not only will the IRS not accept corrections showing zero wages, but such a submission is likely to generate an audit.

The scammer may charge an enormous amount for the fake form. One story said someone paid more than $12,000.

Zero returns/zero gains. In this type of fraud, a promoter advises you to enter nothing but zeros on your federal tax return. Then, of course, you'll owe no tax. In a variation on this scam, you fill out page one of Form 1040, computing your adjusted gross income (AGI). Then you deduct your entire AGI amount on Schedule A by writing, "No gain realized."

Employment tax. If you are a business owner, it's your responsibility to see that income tax, Social Security taxes and Medicare taxes are withheld from employees' paychecks and paid to the proper taxing authorities.

Don't be fooled by promoters hawking an incorrect interpretation of the tax code, which states that withholding is not required. If you attempt to evade your withholding obligations, the IRS may be able to seize your assets and put your company out of business, most notably done through a Civil Trust Fund Penalty, but in other ways too.

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

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.
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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...

That Rebate Check Could Be Just the Right Bait...

Everyone has heard the news by now that the Department of U.S. Treasury will be sending out rebate checks to taxpayers who qualify as part of the 2008 Economic Stimulus Act. This has come as a pleasant surprise for most people and they look forward to receiving their checks. One thing that taxpayers need to be on the lookout for now, other than the rebate they are so eagerly anticipating, is conmen.

At this point, the promise of a speedy delivery of the rebate check could convince some to hand over personal information to scammers. The bait is obviously there folks. Just be on the lookout for such scams. Once the identity thief has your personal and financial data, he or she will use this information to empty your financial accounts, run up charges on your existing credit cards, apply for new loans, credit cards, services or benefits in your name, file fraudulent tax returns or even commit crimes. Most of these fraudulent activities can be committed electronically from a remote location, including overseas. Committing these activities in cyberspace allows conmen to act quickly and cover their tracks before you, the victim, become aware of the theft.

Bottom line…do not let this happen to you. Those who have received a questionable e-mail claiming to come from the IRS may forward it to a mailbox the IRS has established to receive such e-mails: phishing@irs.gov. You may also send an email to this address if you have received any questionable phone calls as well.

Be smart and be patient.


Cheers!
-Taxus

Additional Resources

6 Tips for Avoiding E-Mail Tax Scams