Many taxpayers are under the false impression that income tax scams are only present during tax season. While it is true that more scams tend to present themselves during the busy tax season, many tax scams are in place all year long. In fact many successful scams involve fraudulent activities throughout the year to reduce or avoid any tax liability owed when the time comes to file tax returns. It is important for taxpayers to understand what type of scams are out there as well as how to recognize and avoid being a victim of these scams. Here we look at a few of the more popular scams followed by the IRS.
Abusive Home Based Business Schemes
Home based business tax schemes generally revolve around the inaccurate belief that personal or routine living expenses can be somehow deducted as business expenses. Most schemes or scams involve business owners exaggerating or making up expenses relative to their “business” to be used as deductions to lower their tax liability. Other scams include creating a false business for the purpose of writing off expenses that would otherwise not be considered a tax deduction.
Abusive Offshore Schemes
Abusive offshore tax scams have become popular in recent years with taxpayers trying to “expatriate” their income. Taxpayers are reminded that moving money and other assets to offshore locations for the purpose of evading taxation is illegal. While there are legitimate reasons for some individuals or businesses to participate in foreign transactions, creating a business or “hiding” assets offshore for any reason beyond those that are legal will be considered tax evasion by the IRS and punishable as such.
Anti-Tax Law Schemes
Certain individuals believe that tax laws are unconstitutional and a variety of other concepts which result in the avoidance of paying income taxes. This is often the result of a misinterpretation of the law as well as the United States Constitution. Persons who do not believe in the income tax may recruit other individuals to support their cause. It is important for all taxpayers to understand in almost all cases, the “anti-tax” argument fails when presented in court.
Abusive Trust Tax Evasion Schemes
The IRS has estimated that between now and 2015, $4.8 trillion will be transferred to the next generation, most of which will pass hands in the form of trust funds. There are many schemes out there aimed at the wealthy which offer benefits that reduce taxes or expenses that would otherwise come hand-in-hand with the transferring of assets. Both domestic and foreign schemes have been identified. It is important when passing wealth from on generation to the next that all laws are followed to avoid the loss of assets.
Exempt Organization Abusive Tax Avoidance Transactions
As stated by the IRS, tax-exempt organizations are exempt from federal income tax under various provision of the IRS code. It is still possible however for an organization or a for- profit entity to use a tax exempt organization to conduct abusive tax avoidance transactions. The IRS website has detailed information regarding this matter to ensure a tax-exempt organization is following the letter of the law in regards to taxation.
Employee Plans Abusive Tax Transactions
There is an entire department devoted to spotting abusive tax shelter schemes and promotions in relation to employee plans. This may include abusive Roth IRA transactions, trust exemptions, 401k accelerated deductions and a variety of other transactions related to employee plans. Learn what transactions are legal and which to be avoided by visiting the IRS website for more information.
When it comes to tax avoidance schemes, the most important thing to remember is that regardless of your intention, if you participate in illegal activity you will have to pay the consequences at some point in the future. The IRS is well aware of popular and common tax schemes and individuals participating in these schemes can anticipate getting caught sooner or later. It is best to deal with the IRS and your tax situation head on to avoid future problems that can cost much more money to resolve than what you would have saved by being involved in a tax scheme.