WASHINGTON – A friend of a friend knows of a little-used loophole in the tax code that will let you avoid paying federal income taxes.
But what the friend of the friend doesn’t say is that taxpayers who cite that “loophole” on their returns have likely fallen prey to one of the “dirty dozen” tax scams, the Internal Revenue Service said.
“Don’t be fooled by these outrageous claims. There is no secret way to escape paying taxes,” the agency said in its latest update of the newest and most common scams.
The first scam in the new “dirty dozen” is the misuse of trusts, in which taxpayers transfer assets into trusts to reduce income, personal expenses, estate taxes and other taxable items.
The second scam is the “claim of right” doctrine, which attempts to take a deduction equal to a person’s entire income by labeling it a necessary expense for production of that income. Jackie Pearlman, tax research analyst for H&R Block, said some people have even included the money they give their children for household chores.
The third of the newer scams is known as “corporation sole,” in which people claim to be a bishop or parson of a one-person religious organization so they can apply for federal tax exemptions.
Pearlman and IRS officials said promoters have been known to charge $1,000 for seminars in which they tell people how to claim the religious deductions. They were first seen on the West Coast, but seem to have moved east as authorities tracked them.
IRS officials said there are still plenty of old scams to watch out for, but they seem to be waning in popularity. They include offshore transactions — the use of foreign bank accounts, credit cards and other financial instruments to underreport income — and “special tax refunds” to African Americans for slavery reparations.
Jim Dupree, the IRS spokesman in Maryland, said the African-American refund scam in particular has dropped considerably in the state and is rarely seen now.
Some scams hit victims doubly hard: When businesses are wrongly told not to withhold employment taxes, the employer can be held responsible for back tax payments and the employees are responsible for their unpaid personal income taxes as well.
Two other frequent schemes are preparer fraud — in which unscrupulous individuals take an advance payment on a guaranteed larger refund that never materializes — and improper home-based businesses, which illegally deduct personal expenses as if they were business-related.
More obvious scams are still around as well, but are attracting fewer victims. They include advertisements claiming, “I don’t pay taxes — why should you?” or “Untax yourself for $49.95,” and scams where preparers “share” one client’s children with other clients.
-30- CNS 04-09-04