HOUSTON BUSINESS REVIEW

THE CPA CORNER: TAX SCAMS
By C. Kevin Moore

Kevin Moore is a Principal of C. Kevin Moore & Associates and has two decades of experience as a Certified Public Accountant. Each week he provides the information you need to grow and protect your business.

The Internal Revenue Service urges taxpayers to avoid falling victim to one of the “tax scams” and a variety of other schemes. From the IRS… "At the IRS, we're augmenting our enforcement resources to attack schemes and scams. While we're actively targeting promoters, taxpayers themselves should be wary of anyone who promises to eliminate their taxes. " Don't be fooled by these outrageous claims. There is no secret way to escape paying taxes."

The IRS and other federal agencies are aggressively pursuing and successfully prosecuting promoters of these schemes and many of their clients for fraud and tax evasion. Participation in these schemes can result in imprisonment, fines and repayment of taxes owed with interest and penalties. Even innocent taxpayers involved in these schemes can face a staggering amount of back interest and penalties.

The IRS urges people to avoid these three example schemes:

Misuse of Trusts. Promoters of abusive tax transactions are increasingly urging taxpayers to transfer assets into trusts. The promoters promise a variety of benefits, such as the reduction of income subject to tax, deductions for personal expenses paid by the trust and reduction of gift or estate taxes. Taxpayers should be aware that abusive trust arrangements will not produce the tax benefits advertised by their promoters and that the IRS is actively examining these types of trust arrangements. More than a dozen injunctions have been obtained against promoters, and numerous promoters and their clients have been criminally prosecuted. Before entering any trust arrangements, taxpayers should seek the advice of a trusted tax professional.

Claim of Right Doctrine. In this emerging scheme, people file returns and attempt to take a deduction equal to the entire amount of their wages. The promoters advise them to label the deduction as “a necessary expense for the production of income” or “compensation for personal services actually rendered”. The deduction is based on a complete misinterpretation of the Internal Revenue Code and has no basis in law.

Corporation Sole. The idea is that the arrangement entitles the individual to exemption from federal income taxes as a nonprofit, religious organization as described in tax laws. When used as intended, Corporation Sole statutes enable religious leaders — typically bishops or parsons — to become incorporated as individuals as a way of separating themselves legally from the control and ownership of church assets. But the rules have been twisted at seminars where promoters charge fees of up to $1,000 or more per person. Would-be participants are mistakenly told that Corporation Sole laws provide a “legal” way to escape paying federal income taxes, child support and other personal debts.

Taxpayers should think carefully before paying for services or signing important documents. Don’t be a victim of these scams or others that promise the moon. They carry a high price.